In his State of the Union 2010 speech, President Barack Obama mentioned student loan relief for college graduates who are struggling to make payments:
“…[L]et’s tell another one million students that when they graduate, they will be required to pay only ten percent of their income on student loans, and all of their debt will be forgiven after twenty years – and forgiven after ten years if they choose a career in public service. Because in the United States of America, no one should go broke because they chose to go to college.”
What he’s talking about is a modification to the Income-Based Repayment program (IBR) that was created in 2007. The current program forgives certain unpaid federal student loans after 25 years, or 10 years for people who work in public service. Borrowers enrolled in the program pay a lower monthly payment based on income, family size, and loan amount as long as the monthly payment is lower than what would be paid on a standard 10-year repayment plan.
The Obama-Biden administration wants to modify the program to cap federal student loan payments at 10% of the borrower’s discretionary income (vs. 15%) and forgive unpaid federal student loans after 20 years (vs. 25).
If and when the modifications are made it could be good news for college students, assuming no future President repeals the rules.
There could be a few drawbacks. First, the overall amount of interest paid on the loan could increase since it’s taking more time to repay the loan. The size of the loan could grow if your monthly payments aren’t high enough to reduce the interest. Second, you could owe tax on the loans forgiven if it’s more than $600. A bill that’s currently in Congress, H.R. 2429, would eliminate this tax, but it’s been in the first stage of the process since last May. If you’d like to see it moved forward, write your Congressman. Unfortunately, the proposal doesn’t apply to private student loans.
Sources: WhiteHouse.gov, IPRinfo.org
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