President Obama's much anticipated 2010 State of the Union Speech had some very welcomed news for former and current college students dealing with massive student loan debt. His speech highlighted a new student loan forgiveness program. Here's the details of the plan and how to calculate your new payments under the student loan forgiveness program. The plan also applies to college school dropouts who have a student loan obligation.
The plan proposes two significant changes to the income-based repayment plan that was passed by Congress in 2007 and introduced in July 2009. Under the income-based repayment plan, borrowers make monthly loan payments based on their annual salary, rather than the actual amount of their current student loan debt.
Former students who sign up for income-based repayment currently pay 15% of any income in excess of 150% of the federal poverty line for their family size. This present scenario means that a single borrower with no dependents pays 15% of whatever he makes over $16,245 annually.
Under the new Obama proposal, student borrowers' payments would be lowered to 10% of their incomes above the current established levels. A single borrower with an adjusted gross income of $30,000 and owes $40,000 in student loan debt, would see monthly payments lowered from $170 per month under the current system, to $115 a month under the new Obama repayment plan.
Whats different is that with the old plan, paying off $40,000 in federal student loans over the standard 10-year period require a much higher payment of $460 a month, assuming a fixed 6.8% interest rate.
President Obama also proposed in the his speech that the federal government forgive any balances that remain unpaid after 20 years. That's five years subtracted from the current system's time of 25 years. The government will view any forgiven balance as taxable income for former borrowers who work in the private sector. As with the current rules, former students who go into the public sector will have loans forgiven after 10 years, and the forgiven balance will not be taxable.
Only federal loans such as Stafford loans and Direct loans are qualified for the Income-based repayment plan.