November 22, 2018 12:00 PM PT

Obama Student Loan Forgiveness

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"Obama Student Loan Forgiveness" pops up all over the internet, but there is more to the story than just signing up and having your debt forgiven. Read on to understand how Obama's programs can help your student loan payments, and what pitfalls you should avoid.

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It's quite possible that you've come across some sort of internet ad promising to "use Obama Student Loan Forgiveness to erase your student loan debt!" If it seems too good to be true, that's because it is. That doesn't mean that there isn't some help here, however. President Obama did introduce programs that can significantly lighten your monthly payments and get you to loan forgiveness...eventually. Read on for our breakdown.

Why is it called Obama Loan Forgiveness?

Obama Loan Forgiveness was used as a blanket term to talk about student loan reforms made by the Obama administration. There is no compact "Obama Student Loan Program" like there was the Affordable Care Act for healthcare. Rather, he made it a mission to provide some relief from high student loan payments by introducing the PAYE and REPAYE income-driven repayment plans.

PAYE and REPAYE are very similar on the surface, with some subtle differences that we'll explain here.

PAYE and REPAYE: What do they have in common?

PAYE and REPAYE are both income-driven repayment programs. That means they look at the amount that you're earning and base your loan payment on that. Both programs only have you pay 10% of your discretionary income each month. If you are earning very little money, it is possible to have a monthly loan payment of $0. Your payment amount is recalculated every year when you update your income with the government.

What is discretionary income?
Discretionary income is the money that you have left over each month for extra stuff, like eating out, going to the movies, buying a new video game, etc. PAYE and REPAYE take 10% of your discretionary income as your student loan payment.

The government tallies this amount using their poverty guidelines, which looks at how many people are living in a home and determines their poverty level. It then takes 150% of that and considers it your necessary expenditures income (for things like rent, gas, etc.) If you're living by yourself (outside of Hawaii and Alaska), that number will be $18,210. That number is then subtracted from your yearly salary. If you're earning $30,000 per year, it will look like this:

$30,000 (annual salary)
- $18,210 (necessary expenditures)
$11,790 (discretionary income)

Split that $11,790 over 12 months and you get $982.50 per month in discretionary income. 10% of that is going to be your student loan payment. That means you'll be paying $98.26 per month in student loans. The federal government even has a handy calculator to help you figure out what this would look like for you.

PAYE and REPAYE are both available for your direct subsidized and unsubsidized loans, direct PLUS loans for students, and Direct Consolidation loans. They will also cover FFEL and Perkins loans if they're consolidated under a Direct Consolidation Loan. They aren't able to help you out with your Parent PLUS loans, however.

Both programs also last 20 years for undergraduate loans. After 20 years, the remaining loan balance is forgiven. Just like that. Gone.

There is a catch here. All of that forgiven debt is considered taxable income, so you need to account for that in your taxes for the year. Say you have $50,000 of forgiven debt. If you're earning $25,000 a year and you add in the $50,000 of forgiven debt, it looks like a lot more income to the government. In that case, you could be paying $5,000 in taxes that year (this is just an estimate and could change with the new tax plan). The IRS doesn't let you spread those payments out (unless you want to pay for that luxury), so you're going to have to pay it all in one lump sum. As long as you're prepared to make the payment, you'll be fine. Just don't let it catch you off guard.

Make sure that you also consider that PAYE and REPAYE spread your payments out for 20 years. That means that, thanks to interest, you might end up paying significantly more than under the Standard Plan. Unless you're going to have a good chunk of loans forgiven, or your current payments are unsustainable, you might be better with the Standard Plan. If you decide to stick with the Standard, you can figure out how to pay off your loans faster.

PAYE: How it is different

PAYE was Obama's first income-driven repayment program. There were two requirements to qualify:

  • You couldn't owe any money on an old Direct Loan or Federal Family Education Loan (FFEL) when you got a Direct or FFEL loan after October 1, 2007.

  • You needed to receive a disbursement of a Direct Loan after October 1, 2011.

Basically, that means you have to be a new borrower after 2011 (with no outstanding loan balances from before 2007).

PAYE's payments are capped. This means you'll never pay more than what you would pay on the Standard Plan. Because your income determines your payments, it's possible that you'll start making enough money that your monthly payments grow larger than the ones you were making under the Standard Repayment Plan. If that happens, PAYE will automatically switch your payments back to the lower payments from the Standard Plan.

REPAYE: How it is different

The REPAYE plan was intended to reach all of the borrowers who were ineligible for PAYE. Why they didn't just do this from the beginning we may never know.

Any borrower with eligible (read: federal Direct loans) can make payments under REPAYE. If you have graduate student loans, your repayment period will be 25 years instead of 20 years.

One thing to note with REPAYE is that your payments are not capped. If your income grows, your payments might end up being higher than they were under the standard repayment plan. Here's the breakdown:

  • Salary: $25,000
    • Payments under standard plan (10 years): $272
    • Payments under REPAYE (20 years): $57

  • Salary: $55,000
    • Payments under standard plan (10 years): $272
    • Payments under REPAYE (20 years): $302

If you're pulling in a lot of money per month compared to your student loan payment, it might be better to stick with the Standard Plan instead of switching to REPAYE.

Obama Student Loan Scams

There were a lot of student loan "companies" that popped up promising to enroll people in Obama's Student Loan Forgiveness program, for a fee. This isn't technically illegal; if you want to pay someone to sign you up for PAYE or REPAYE, that's your prerogative. However, both of these programs are free and easy to sign up for if you call your student loan servicer.

Don't be suckered into any student loan scams that promise immediate student loan forgiveness or tell you that you need to act immediately to receive the benefits. Don't pay a fee upfront to get signed up, accept offers to have a company pay your student loans for you, pay someone who claims to be from the Department of Education, or pay someone who tells you that you'll be preapproved for forgiveness through them.

We repeat: Obama student loan forgiveness means getting yourself on the PAYE or REPAYE plans, which you can do by yourself by calling your loan servicer.

Trump's Student Loan Reforms

Trump and Betsy Devos have been making some waves in the student loan world, as well. While it might not often make the news, they have made some changes that could affect you. They've also floated some ideas that would make some major changes in the student loan world.

The Tax Cuts & Jobs Act changed some student loan policies, although we hope you never need to use them. Now your loans can be discharged if you become totally and permanently disabled, or die. That loan discharge is not considered taxed income, so you (or your family) don't have to worry about that extra cost. Again, we hope that this isn't something you need, but it's there should something terrible happen.

We have also heard a series of proposals from Trump on student loan reform. It's not clear what the Trump's administration wants because they've made a series of sometimes conflicting statements. Overall, we can deduce that they want to create one income-driven repayment option, which would replace all repayment options, including PAYE and REPAYE.

The other major change would be the elimination of the Public Service Loan Forgiveness program. That would be a huge hit to people considering working in the public sector. If you're already working through the program, you'll most likely be grandfathered in.

Remember these last two are just proposals, not actual policy.

Bottom Line

The PAYE and REPAYE programs are great options if you feel like your payments under the standard plan are too high. They can also help you get rid of a lot of debt after 20 years of payments (or 10 years with PSLF). Be sure to use our advice above to decide if they make sense for your loan debt.

More from CreditDonkey:

Private Student Loan Forgiveness

National Student Loan Data System

Public Service Loan Forgiveness

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