Step 1 You must enroll into either the William D. Ford Direct Loan program, Income Contingent, Income Based, Pay As You Earn, or Revised Pay As You Earn repayment plans, your loan balance would be forgiven at the end of the term if you still have a remaining balance.
Step 2 The term of the loan would be between 20-25 years depending on which repayment plan you choose, and when your loans were originally borrowed.
Step 3 How much you will be forgiven will depend on your original loan amount, how much you are earning, and how much your earnings fluctuate during your repayment term.
Student loan debt is often cited as being one of the biggest modern financial crises. Many former students face an impossible amount of debt and in turn, political leaders have been looking for a way to solve these issues.
Why Do People Call it Obama Student Loan Forgiveness?
“Obama Student Loan Forgiveness” is a nickname for the William D. Ford Direct Loan program. The name came about when President Obama reformed part of the Direct Loan program in 2010 by signing the Health Care and Education Reconciliation Act of 2010.
Student Loan Forgiveness programs have been set into place in order to help aid former students in paying for their education following graduation (sadly, these programs are only applicable to students with federal student loans, not private).
How Obama Student Loan Forgiveness is Different
The Direct Loan Program (FDLP) is the only government-backed loan program in the United States. It is commonly referred to as Obama Student Loan Forgiveness because, in July of 2010, President Barack Obama introduced new loan programs enacted under the Health Care and Education Reconciliation Act of 2010. As a result of expanded funding for federal student loans, more borrowers gained access to more options with loan repayment.
President Obama made the following changes to federal student loan forgiveness:
- The federal government will no longer give subsidies to private lending institutions for federally backed loans.
- Borrowers of new loans starting in 2014 will qualify to make payments based on 10% of their discretionary income.
- New borrowers would also be eligible for student loan forgiveness after 20 years instead of 25 on qualifying payments.
- The money will be used to fund poor and minority students and increase college funding.
What Are The Benefits of The Student Loan Forgiveness Program?
In this program, there are many benefits that a borrower can take advantage of. The borrower has the ability to consolidate all their federal student loans into one new loan, and in that consolidated loan, the borrower is able to choose a repayment plan that is affordable.
Direct Loans, whether consolidated or not, do qualify for all of the federal loan forgiveness programs unless there were any Parent Plus loans included in the consolidation.
The Six Different Repayment Plans
- Standard Repayment – The borrower will pay a fixed amount each month for the life of the loan. The payment would be determined by your borrowed amount, interest rate, and term of the loan.
- Graduated Repayment – The borrower would make payments lower than the standard repayment plan, but would gradually increase every two years.
- Income Contingent (ICR) – In this plan, the borrower would make payments based on their income, family size, loan balance, and interest rate.Borrowers in the ICR can have a payment as low as $0.00/mo
- Income-Based (IBR) – This plan bases the borrower’s payment strictly on their income and family size. The balance of the loan and interest rate are not used in calculating the monthly payment. The borrower would be responsible to pay 15% of their discretionary income to their federal student loans. Borrowers in the IBR can have a payment as low as $0.00/mo
- Pay As You Earn (PAYE) – This plan usually has the lowest monthly payment, and is also based on your income but uses 10% of your discretionary income as a payment instead of the 15% used in IBR. Qualifying for the PAYE repayment plan is more difficult than the others. Borrowers in the PAYE can have a payment as low as $0.00/mo
- Revised Pay As You Earn (REPAYE) – The REPAYE plan also uses 10% of your discretionary income to calculate your monthly student loan payment, but will account the income of both spouses even if filing separately. The REPAYE plan also includes the best interest loan forgiveness benefits.
In the Obama Student Loan Forgiveness program, interest in the IBR does not capitalize on the subsidized portion of your Direct Loan. This applies only for the first three years of your IBR payment, and only if your IBR payment is less than what is normally due to interest. This can amount to many thousands of dollars depending on your loan balance and what type of payment you currently qualify for.
There is also interest forgiveness in the PAYE and REPAYE plans as well. Here is an in-depth guide on student loan interest forgiveness.
Example: A borrower owes $40,000 in subsidized loans. The interest rate is 6.875%, and the term is 25 years. The borrower is single with an adjusted gross income of $25,000/yr. The interest on this loan would normally be $229.17 per month, but the borrower can qualify for an IBR payment of $93.69. In this case, the borrower would be forgiven $229.17 – $93.69 = $135.48 of interest per month. If this person’s financial situation does not change for three years, they would be forgiven $135.48 x 36 = $4,877.28.
Student Loan Forgiveness At The End Of The Loan Term
If you enroll into either the Income Contingent, Income Based, Pay As You Earn, or Revised Pay As You Earn repayment plans, your loan balance would be forgiven at the end of the term if you still have a remaining balance.
The term of the loan would be between 20-25 years depending on which repayment plan you choose, and when your loans were originally borrowed.
How much you will be forgiven will depend on your original loan amount, how much you are earning, and how much your earnings fluctuate during your repayment term.
Example: Borrower owes $85,000 in federal student loans. The interest rate is 6.875% and the term is 25 years in the Income Based Repayment Plan. The borrower is currently earning $35,000 per year and expects their income to stay the same for the term of the loan. This borrower would qualify for an IBR payment of $218.69, and assuming the income doesn’t change, would make these payments for 25 years or 300 payments. The total amount the borrower would pay on this loan is 300 x $218.69 = $65,607 of the original $85,000 that was borrowed. This person would qualify for $19,393 in student loan forgiveness on the principal balance after making those qualifying payments. This does not include the interest that is being forgiven as the borrower would normally pay much more than the original debt due to the interest on the loan.
Other Student Loan Forgiveness Programs
You may be wondering, are there options for federal student loan forgiveness?
Under the William D. Ford Direct Loan program, there are actually a few different forgiveness options, and each one is effective in addressing the specific needs of student borrowers. Regardless of your financial status, occupation, or age, there are several federal student loan forgiveness programs that could offer you an effective solution.
Public Service Loan Forgiveness
Payments made in the Direct Loan program in an IBR, ICR, or PAYE repayment count as qualifying payments for those who work in the public sector and would like to apply for public service loan forgiveness. In the public service loan forgiveness program, you may qualify for forgiveness after 10 years or 120 payments instead of the standard 20-25 year forgiveness.
Unfortunately, many people are not aware that they must be in the Direct Loan program and in one of the correct repayment plans to qualify for this forgiveness. The public service loan forgiveness program is also quite often confused with the term Obama Student Loan Forgiveness.
Teacher & Disability Forgiveness
There are other programs that offer student loan forgiveness as well, but they are not part of the Obama Student Loan Forgiveness (Direct Loan) program. These are separate programs that exist specifically to help teachers by offering a principal reduction, or the disabled by offering a complete discharge on your federal student loans.
Enroll in the William D. Ford Direct Loan Program
If you are one of the millions of former college students facing an impossible amount of debt to repay, there are a variety of government programs set into place in order to help you pay back your loans in a timely and more reasonable manner. The William D. Ford Direct Loan program (with some additions, The Obama Student Loan Forgiveness Program) aims to provide more ways to do so. Learning more about and applying for these programs is a great way to not only lessen your monthly payments but also improve your credit.
The Trump administration is taking its own approach to the William D. Ford Direct Loan Program, and student loan legislation as a whole. Learn more about Trump’s plans for student loan forgiveness here.
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