Obama Student Loan Forgiveness Act Explained

Student loan debt overwhelms thousands of students who want to go to college, but can’t afford the high tuition rates.  If you graduated with $30k, $40k, or $50k+ in student loans, you’re not alone.  Making the payments on student loans can be very difficult, especially if you are having trouble finding a decent job.

Fortunately, there are student loan forgiveness programs available to help ease the burden of high student loan payments.  Known to many as the Obama student loan forgiveness act, this program will lower your student loan payment based on your income and your family size. Here’s how it works:

Student Loan Forgiveness Act

Payments Capped at 10% of Discretionary Income

If you qualify, your student loan payments will be capped at 10% of your discretionary.   As an example, someone who borrowed $45,000 in federal loans at 6.8% interest would have a payment of about $517 per month.  If their income was $50,000 annually, their payment would be lowered to about $277 per month.  That’s a huge difference!  Here’s a chart that shows how your student loan payment is capped.

obama student loan forgiveness chart

Loan Balance Forgiveness

If you make payments for 20 consecutive years and still have a balance, your federal student loan balance will be forgiven.  Yes, completely forgiven as in $0 owed.  However, the forgiven amount will be figured as taxable income.

How to Qualify for Student Loan Forgiveness

The Pay as You Earn program is only available to people who meet certain qualifications.

Federal Direct Loans Only

Private loans are not eligible – only federal direct loans can qualify for the student loan forgiveness program.

  • Direct Subsidized and Unsubsidized Loan
  • Direct PLUS loans made to student
  • Direct Consolidation Loans that do not include (Direct or FFEL) PLUS loans made to parents

New Borrowers Only

Who is a ‘new borrower’?  If you took out a federal student loan before October 1, 2007, you are not considered a new borrower.  Even more, you have to have received a federal direct student loan after October 1, 2011.  If you don’t know when you took out your loans, you can visit the National Student Loan Data System.

Financial Hardship

You may need to prove financial hardship to qualify.

Income Based Repayment

There is also another option available called the Income Based Repayment program.   The key features of this program includes:

  • 15% income cap on Federal student loan payments
  • Loan forgiveness after 25 years
  • Forgiven loan is taxable income

Obama Loan Forgiveness For Teachers

If you have been teaching for five consecutive academic years, and have outstanding federal student loans, you may be eligible for student loan forgiveness.

If you completed 5 years of service before October 30, 2004, you may receive up to $17,500 in loan forgiveness if you were a full time math, science, or teacher for students with disabilities.

If you completed 5 years of service after October 30, 2004, you may receive up to $17,500 in loan forgiveness if you taught math, science, or students with disabilities at a highly qualified full time elementary or secondary school.

The Department of Education gives a much greater summary of the teacher student loan forgiveness program here.

The bottom line is that if you are struggling to make student loan payments, there’s probably a program that will help you.  Whatever you do, avoid defaulting on your loans.  Call your borrower and talk with them about ways to lower your student loan payment.

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