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How To Utilize Student Debt Forgiveness
Many college graduates enter the workforce strapped for cash thanks to student loan debt. Most student loans begin to mature six months after graduation, which creates an urgent need for grads to figure out how they are going to repay their loans. Since 2007, there has been student debt forgiveness reform that has created more options for graduates to repay their loans. However, most forgiveness programs are only available to borrowers with federal loans. To learn more about student loan debt forgiveness and to see if you qualify, check out the information below.
Obama Student Loan Forgiveness
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You’ve probably seen ads advertising the “Obama Student Loan Forgiveness” programs. Would you be surprised to know this is a real thing? Well, it is, but it isn’t named after Obama. What the advertisements are referring to is reforms to the William D. Ford Direct Loan Program. It’s been given the nickname Obama Student Loan Forgiveness Program because it came into effect when the President signed the Health Care and Education Reconciliation Act of 2010.
Health Care and Education Reconciliation Act of 2010 Changes
When Obama signed the Direct Loan reform in 2010 several changes that affect borrowers were made. First, it eliminated subsidiaries to private lending institutions for federally backed student loans. It introduced new repayment options that make it easier for graduates to pay back their loans successfully. The new reforms specifically offer more funding to poor and minority college students. The reforms also established requirements to qualify for repayment plans and forgiveness.
How Does Student Debt Forgiveness Work?
The student debt forgiveness programs vary considerably from one plan to another. For this reason, it is important for those considering these programs to stay educated and up to date. To qualify for student debt forgiveness, a borrower must have federally funded loans. A borrower also cannot be in student loan default. A borrower is usually considered in default when they are at least nine months behind on student loans.
Just qualifying for student debt forgiveness does not mean you will get it. One of the biggest obstacles to obtaining forgiveness is meeting the tight requirements required by the programs. Right now, the only way to address the demands of student loan forgiveness is to be enrolled in one of the forgiveness programs including:
• Public Service Loan Forgiveness
• Teacher Loan Forgiveness
• Perkin Loans Cancellation
Many of the forgiveness programs mentioned above, also require a borrower to be in a specific repayment plan. The five top compensation plans offered for student loan borrowers are explained in detail below.
Student Loan Debt Forgiveness Repayment Plans
The reform act of 2010 introduced five student loan repayment plans. Many of the programs have similarities, but each is different. If you are hoping to have your loans forgiven someday, it’s important to sign up for the right repayment plan. Failure to be enrolled in the right program can disqualify you from forgiveness in the future. The five repayment plans are:
3. Income-Contingent (ICR)
4. Income Base (IBR)
5. Pay as You Earn (PAYE)
The Standard repayment plan allows borrowers to pay a fixed, monthly payment during the life of a loan.
A graduated repayment plan allows borrowers to start repaying their student loans at an amount that is less than would be required under the standard repayment plan but the amount due steadily increases over time.
Income Contingent (ICF)
The third repayment plan, the ICF, allows student loan monthly repayments to be based on income, family size, balance, and interest rates. With all factors considered, an ICF repayment plan can be as low as $0.00 monthly.
Income Base (IBR)
With an income base (IBR) repayment plan, the monthly amount due is calculated based strictly on income and family size. Loan interest doesn’t capitalize on this type of debt, and the monthly amount due can be $0. One of the strictest requirements of this plan is that at least 15% of discretionary income must be paid towards the loan amount.
Pay as Your Earn (PAYE)
The last student loan forgiveness repayment plan is the hardest to qualify for. It calculates student loan payments based on income alone. It also has the lowest discretionary income requirements at just 10%. As with the ICF and IBR programs, the monthly payment on this type of repayment plan can be $0.
The ICF, IBR, and PAYE repayment plans also qualify borrowers to have the balance of their student loans forgiven at the end of a pre-determined term. In most situations, the end of the term is 20 to 25 years. However, forgiveness will only be granted if the borrower is working in an accepted industry, specifically the public services sector and is enrolled in an appropriate Direct Loan repayment program. Other requirements that a borrower may be required to meet include working in the industry for a given period, paying on their loan for at least ten years or making 120 payments.
The Bottom Line
The bottom line is borrower’s need to be aware of how much money they are borrowing for their education, who they are borrowing from, and have a general plan for how they will repay the money someday.
Student loan forgiveness programs can be effective and achievable, but only if borrowers stay educated on changes, fill out the paperwork, and follow all required guidelines for repayment plans. However, there are some cons associated with these programs as well. For instance:
• Only borrowers with federally funded loans qualify for student loan forgiveness
• Tight restrictions and requirements for enrollment
• Misunderstandings about expectations
For example, some borrowers have found themselves disqualified for forgiveness because they haven’t worked in a certain industry long enough, they don’t stay up to date with annual paperwork, or stop making payments on loans while waiting for acceptance in a particular repayment plan. Lastly, it’s important to be enrolled in the appropriate repayment program. Not all repayment programs, such as the standard and graduated plans, will qualify you to have your debt forgiven in the future.
The best way to qualify for student loan forgiveness is to ask lots of questions. Seek advice for qualified and trained individuals and do your research. The programs mentioned above are free to enroll in, which means you don’t have to pay someone, an agency, or an organization to help you achieve forgiveness. By doing the appropriate research, you can remove the burden of massive student debt and focus on other aspects of your life instead.
To learn more about student debt you can check out our full article here