The United States produces more college graduates than any other nation in the world, yet the overwhelming majority of these graduates finish their education with student loan debt. According to the Institute for College Access & Success. over 70 percent of undergraduates who completed a four-year program had student loans to repay. The average debt was nearly $29,500 in 2012, compared with close to $23,500 in 2008. This debt load is especially burdensome for graduates who go to work in public service professions, like teaching or law enforcement. While these professions are vital to the welfare of the American public, they may not pay well enough to cover large monthly loan payments. How can today’s college students pursue their academic dreams without compromising their future financial stability? In 2010, President Barack Obama took a step forward in student loan reform by signing the Health Care and Education Reconciliation Act. The student loan initiatives included in this new law are now informally known as the “Obama student loan forgiveness” plan. As of 2014, Americans enrolling in college can now benefit from expanded repayment plans and more generous repayment terms. The ultimate goal of Obama’s student loan reform is to place an affordable college education within the reach of more Americans.
What Are the Terms of the Act?
The Health Care and Education Reconciliation Act relieves some of the debt burden on college grads repaying their student loans. College students enrolling on or after July 1, 2014 can take advantage of these initiatives:
- Income-Based Repayment Plan (IBR). Obama’s new law expands the income-driven repayment plans that are currently available to student borrowers. According to the revised IBR plan, graduates pay a maximum of 10 percent of their discretionary income — or their remaining earnings after they have covered basic living expenses like housing and food. Before 2014, the maximum repayment was 15 percent of the borrower’s disposable income. The Obama Administration estimates that over 1 million borrowers will enjoy reduced loan repayments as a result of this plan.
- Student Loan Forgiveness. After 20 years of making regular payments on a student loan, responsible borrowers can qualify to have the rest of their loan forgiven. Before 2014, student loan debt could be forgiven after 25 years. Under the new law, public service workers (teachers, nurses, peace officers, members of the military, and others) may qualify for loan forgiveness after 10 years of making regular monthly payments.
The terms of Obama’s loan forgiveness initiatives apply only to federal loans, not to private student loans. Refinancing or consolidating private loans can make it easier to repay private debts. Meanwhile, if you have both federal and private loans, lowering your monthly federal payments will allow you to devote more of your income to paying off your more expensive private loans.
What if I Enrolled in College Before 2014?
In 2012, Obama initiated a “Pay as You Earn” program to help college students take advantage of student loan reform before 2014. Students who enrolled in college too early to participate in the Income-Based Repayment plan may apply for the Pay as You Earn program or for an Income-Contingent Repayment Plan. Under the Pay as You Earn plan, college grads who qualified as new borrowers as of October 1, 2007 can pay a maximum of 10 percent of their disposable income on their student loans each month. After 20 years of regular payments, the loan is forgiven if there is an outstanding balance. Under the Income-Contingent Repayment Plan (ICR), there are no income requirements to meet. Borrowers can pay either 20 percent of their disposable income, or the amount that they would pay on a standard fixed repayment plan with a 12-year loan period, whichever is lower. The maximum repayment period is 25 years. With all of the income-driven repayment plans (the IBR, the ICR, and Pay as You Earn), the remaining balance on the loan is forgiven after the repayment period ends.
Do I Qualify for an Income-Based Repayment Plan?
To be considered for any of the three income-driven repayment plans, you can apply through the company that services your loan, or through the U.S. Department of Education at Studentloans.gov. To quality for the IBR under the terms of the Health Care and Education Reconciliation Act, you must meet these criteria:
- Enroll in a higher education program in 2014 or later
- Have a federal student loan, such as a Stafford or a Perkins Loan
- Make regular payments on your loan for the required length of time (20 years, or 10 years for public service workers)
- Your monthly repayment under the Income-Based Repayment Plan must be lower than it would be under the Standard Repayment Plan with a repayment period of 10 years
The terms of the Health Care and Education Reconciliation Act do not apply to loans signed before July 1, 2014. If you have loans dated prior to July 1, 2014, the original lending terms will still be in effect. If you have an older loan, talk with your loan servicer to find out whether you qualify for the Pay as You Earn program or the Income Contingent Repayment Plan.
Do I Qualify as a Public Service Worker?
The Health Care and Education Reconciliation Act encourages students to enter public service professions by offering them more generous repayment terms, like a 10-year maximum repayment period. But according to CBS News. public service workers are not taking full advantage of income-driven repayment plans and other student loan forgiveness programs. Many do not apply for these programs because they don’t realize that they qualify as public service workers. This category is broader than most people realize, including professionals such as:
- Members of the U.S. Armed Forces
- Law enforcement officers
- Emergency workers
- Social workers
- Employees of non-profit 501(c)(3) organizations
In general, people working in public service professions earn less than college grads who take jobs in business, finance, or other areas of the private sector. To make it easier for public service workers to repay large student loans, the government offers several loan forgiveness programs. The Public Service Loan Forgiveness Program (PSLF). for example, pays off the remaining loan balance for full-time public service employees who have made a minimum number of payments. The PSLF applies to federal Direct Subsidized Loans, Direct Unsubsidized Loans, Direct Plus Loans, and Direct Consolidation Loans.
What Other Benefits Does the Act Provide?
In addition to making student loan repayment more manageable, Obama’s student loan reform includes the following initiatives:
- Increasing the American Opportunity Tax Credit, the largest college tax credit available to college students in the United States
- Investing more funds in educational institutions that serve minorities, including community colleges and historically black universities, tribal colleges, and Hispanic-serving institutions
- Streamlining the process of applying for student loans by simplifying the Federal Application for Financial Student Aid (FAFSA)
- Making all new student loans Direct Loans while eliminating subsidized loans through private financial institutions (The Obama Administration estimates that ending the subsidized loan programs will save the government nearly $68 billion dollars, a percentage of which can be applied to future college loan programs.)
- Increasing the government’s investment in federal Pell Grants to make these awards available to more American college students.
Making Student Loans More Manageable
The Health Care and Education Reconciliation Act reflects the government’s growing concern about the impact of student loan debt. With so many college grads taking on unmanageable debt loads, the economy is bound to feel the effects of loan defaults and bankruptcies. These new initiatives offer hope to young adults and mature students seeking to further their education at affordable rates. To find out how you can benefit from student loans, use our free online student loan calculator.