While there is no program officially titled “Obama Student Loan Forgiveness,” you may have seen this phrase thrown around. It often refers to programs enacted while Obama was in office, namely the Health Care and Education Reconciliation Act of 2010 and the introduction of the Pay As You Earn (PAYE) and Revised Pay As You Earn (REPAYE) plans enacted in 2012 and 2015, respectively.
The result of this legislation is more federal student loan repayment options and additional options for student loan forgiveness. In this article, we outline all current federal student loan forgiveness programs, including those resulting from this legislation and what is required to qualify for each.
Health Care and Education Reconciliation Act of 2010
The relevant portion of this act can be found in Title II: Education and Health. Part II of this title applies specifically to student loan reform. The key features include:
- Terminated Federal Family Education Loans (FFEL), which were federally backed student loans made through private lenders. All federal student loans are now made through the William D. Ford Federal Direct Loan Program.
- Required that many loan servicers split into two companies because they weren’t allowed to service both federal and private loans. (This is the reason Sallie Mae launched its sister company Navient. Navient now services federal student loans.)
- Changed Income-Based Repayment (IBR) plan beginning July 1, 2014, so that instead of monthly payments being 15% of discretionary income, they are now 10%, and instead of the remaining loan balance being forgiven after 25 years, it is now forgiven after 20 years. (This change only applies to new borrowers, however.)
PAYE and REPAYE
On Dec. 21, 2012, the U.S. Department of Education announced the Pay As You Earn (PAYE) program.
This program requires that you must be a new borrower on or after Oct. 1, 2007, and must have received a disbursement of a Direct Loan on or after Oct. 1, 2011, and can be used to repay Direct Subsidized and Unsubsidized Loans, Direct PLUS Loans made to students, and Direct Consolidation Loans as long as they do not include PLUS Loans made to parents.
Repayment on this plan depends on your income and is done in the following way:
- Monthly payments are 10% of your discretionary income.
- Your discretionary income is counted as the difference between your adjusted gross income and 150% of the poverty wages for your family size.
- If you are married and file jointly, your spouse’s income is included.
- You must update your income information each year.
- If 10% of your income ever becomes more than what you would have paid under the Standard 10-Year Repayment Plan, you will pay no more than you would have on that plan.
- If any loan balance remains after 20 years, it is forgiven.
- You may be required to pay income tax on the forgiven amount.
Four years after the PAYE program was announced, the Revised Pay As You Earn (REPAYE) program was launched on Dec. 17, 2015, and came with fewer restrictions. All Direct Loan borrowers are eligible for REPAYE and can use this program to pay off Direct Subsidized and Unsubsidized Loans, Direct PLUS Loans made to students, and Direct Consolidation Loans that do not include Parent PLUS Loans.
The repayment under this program is almost the same as with the PAYE program with the following notable exceptions:
- Your monthly payment is 10% of your discretionary income regardless of whether that ends up being more than your Standard 10-Year Repayment Plan payment.
- If any of your loans were taken out for graduate study, your remaining balance would not be forgiven until after 25 years of payments have been made.
PAYE and REPAYE were an improvement on the Income-Based Repayment (IBR) plan for those who took out loans before July 1, 2014. If you took out loans after this date, IBR and PAYE are essentially identical.
Running the Numbers for PAYE, REPAYE, and IBR Loan Forgiveness
It’s important to note that even with the promise of forgiveness at the end of 20 or 25 years, it is possible to end up paying more in total on any of the income-based plans than you would on the Standard 10-Year Repayment Plan. This is because you will pay more in interest on a loan that has a longer repayment period.
It’s also important to note that most people are likely to repay their entire loan balance through these programs before the 20- or 25-year end date and may never receive loan forgiveness.
As an example of how this can be, imagine you are an average graduate from a four-year institution. You probably have around $30,000 in loan debt at about a 4% interest rate. You are likely to get a job with a median salary of $45,000 per year. This means that 10% of your discretionary income, assuming you are single, comes to around $215 per month.
If we assume nothing changes during the lifetime of the loan and your career, then you will pay off the loan by the 16th year to a tune of about $40,400. Paying under the Standard 10-Year Repayment Plan, you would have monthly payments of just over $300 and pay a total of around $36,400 by the end. Hence, if you can afford it, you save more money long term just sticking to standard repayment.
But suppose instead that you graduate with the same debt, same job, but have two children to take care of. Your monthly payments under an IBR plan would be just over $100 a month. At the end of 20 years, very little of your principle would be paid down because these payments barely cover the interest, and at the end of 20 years, you’d have over $28,000 forgiven after having paid just under $25,000.
While graduate students often carry more debt, they also tend to make higher incomes, and the program does not grant them forgiveness until after 25 years of repayment. That said, IBR plans can still be excellent repayment options if for no other reason than the payment amounts are income-based, so you don’t have to worry should you move to a lower-paying job or face any hardships.
And while the odds are that your loan will be paid in full before the 20-year mark, if times get tough and you struggle for a while, that potential forgiveness is still there, and you won’t have to keep paying on the loans once 20 years come.
Note also that the CARES Act, which was put in place in March of 2020, has suspended federal student loan interest and payments until the end of September. During this suspension, nonpayments count as payments on any of the income-based plans.
Public Service Loan Forgiveness Program (PSLF)
If you qualify for it, the Public Service Loan Forgiveness (PSLF) program offers one of the best options for loan forgiveness. You must enroll in one of the income-based programs described previously, except that you receive loan forgiveness after only 10 years of payment.
Types of employment that qualify for PSLF include:
- Government organizations at any level (U.S. federal, state, local, or tribal)
- Not-for-profit organizations
- Full-time AmeriCorps or Peace Corps volunteers
To stay on track, you will need to submit a Public Service Loan Forgiveness Employer Certification Form annually or when you change jobs.
Teacher Loan Forgiveness
If you are a teacher or plan on going into teaching, you may qualify for teacher loan forgiveness for your federal student loans. To qualify, you must meet the following requirements:
- You must not have had an outstanding balance on Direct or FFEL Program loans as of Oct. 1, 1998, or on the date that you obtained the loan(s) after Oct. 1, 1998.
- You must have been employed as a full-time, highly qualified teacher for five complete and consecutive academic years, and at least one of those years must have been after the 1997-98 academic year.
- You must have been employed at an elementary school, secondary school, or educational service agency that serves low-income students.
- The loan(s) for which you are seeking forgiveness must have been made before the end of your five academic years of qualifying teaching service.
The maximum amount that can be forgiven is either $17,500 or $5,000, depending on the subject area taught. The higher amount is generally reserved for those who teach math or science at the secondary or special education level.
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