November 22, 2018 12:00 PM PT

Obama Student Loan Forgiveness

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Student loan forgiveness involves more than just signing up and having your debt forgiven. Learn what you need to do and some pitfalls to avoid.

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You've probably come across internet ads promising to "use Obama Student Loan Forgiveness to erase your student loan debt!" Sounds too good to be true, right?

That's because it probably is. But there is help available. President Obama introduced programs that can significantly lighten your monthly payments and get you loan forgiveness...eventually.

Read on to learn more.

Why is it called Obama Loan Forgiveness?

Obama Loan Forgiveness is a blanket term to talk about student loan reforms made by the Obama administration. There is no compact "Obama Student Loan Program" as 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.

These plans are very similar on the surface. But they do have some subtle differences.

PAYE and REPAYE: What do they have in common?

PAYE and REPAYE are both income-driven repayment programs. Both look at the amount you're earning and base your loan payment on that. Under these programs, you pay 10% of your discretionary income each month.

What is discretionary income?
Discretionary income is the money that you have left over after paying bills each month, It can be used for "extra stuff" like eating out, going to the movies, or buying a new video game.

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.

The government tallies this amount using their poverty guidelines. 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.

Example:
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:

  • Direct subsidized and unsubsidized loans
  • Direct PLUS loans for students
  • Direct Consolidation loans.

They 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.

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.

Example::
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'll pay in one lump sum.

Remember: PAYE and REPAYE spread your payments out for 20 years. That means that you might end up paying significantly more than under the Standard Plan when you factor in interest.

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. You'll never pay more than what you would pay on the Standard Plan.

You Should Know: Your income determines your payments. As your income grows, your monthly payments may 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.

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.

With REPAYE, 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

A lot of student loan "companies" promise 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.

Take care to avoid student loan scams. They may promise immediate student loan forgiveness or tell you that you need to act immediately to receive the benefits.

Here are some other DONT's to remember:

  • Don't pay a fee upfront to get signed up.
  • Don't accept offers to have a company pay your student loans for you
  • Don't pay someone who claims to be from the Department of Education
    Don't pay someone who tells you that you'll be preapproved for forgiveness through them.

Remember: 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

President Trump and Secretary of Education Betty Davos have made some changes that could affect you.

The Tax Cuts & Jobs Act changed some student loan policies. 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.

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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