President Obama proposes to cap student loan payments at 10% of
discretionary income as part of a package of proposals outlined by the
White House Task Force on Middle Class Families on January 25,
2010. Debt would also be forgiven after 20 years in repayment.
This proposal would enhance the income-based repayment plan which was
enacted by Congress as part of the College Cost Reduction and Access
Act of 2007 and which became effective on July 1, 2009. Income-based
repayment bases monthly payments on federal student loans on the
borrower's discretionary income, not the amount they owe on their
student loans. Income-based repayment currently caps student loan
payments at 15% of discretionary income and forgives the
remaining debt after 25 years in repayment. Discretionary income is
defined as the amount by which adjusted gross income exceeds 150% of
the poverty line.
The changes to help middle class families will be proposed as part of
the President's federal budget for the fiscal year starting October 1,
2010 (FY2011). It is possible that the changes to income-based
repayment could be implemented sooner by adding them to the Student
Aid and Fiscal Responsibility Act, which passed the House of
Representatives in 2009 but is still pending in the Senate.
This proposal would yield meaningful repayment relief to hundreds of
thousands of borrowers whose federal student loan debt exceeds their
income. It would cut their monthly payments by an additional one third and forgive
the remaining debt sooner. For example, a borrower with $40,000 in
federal student loans and an adjusted gross income of $30,000 a year
could see their monthly payments drop from $172 in the current
income-based repayment plan to $115 a month. This compares with the
monthly payment of $460 under standard ten-year repayment and $278
under extended 25-year repayment. The acceleration of the loan
forgiveness will ensure that borrowers are not still paying back their
own federal student loans when their children enroll in college.
Income-based repayment is available to borrowers in both the Direct
Loan and federally-guaranteed student loan programs. It may be used
with Stafford, Grad PLUS and consolidation loans, but not with private
student loans, Parent PLUS loans or consolidation loans that repay
Parent PLUS loans.
Unfortunately, under current law the loan forgiveness is treated as
taxable income, except for borrowers who qualify for public service
loan forgiveness. (Borrowers who repay their loans in the Direct Loan
program and work full-time in public service jobs get forgiveness of
the remaining loan balance after 10 years.)
For further information, please see the
White House Press Release
and
Fact Sheet.
See FinAid for information about the
current income-based repayment program.
Update: President Obama's proposal was enacted as part of the Health Care and Education Reconciliation Act of 2010, but with a delayed effective date. The improved version of income-based repayment will be available for new borrowers of federal student loans starting July 1, 2014. Existing borrowers will not benefit, as the changes are not retroactive.
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