Student loan forgiveness: What you should know

In the United States, college students and graduates collectively have one trillion dollars worth of debt. The average person, after they leave school, will have accumulated $26,000 to $29,000 in student loan debt.

This has a trickle-down effect on the economy. If graduates are paying back loans every month, they can’t save up for retirement or a mortgage, or pay off credit cards, financing on cars and other debts. They’re unable to spend money at local businesses, as well as at big chains and corporations, which essentially has a negative effect on the economy on a micro and macro level.

These graduates are stuck, and may never be able to accomplish what their parents did at the same age. Currently, President Obama is trying to solve this trillion-dollar crisis by expanding his student loan forgiveness program, according to Forbes’ Jeffrey Dorfman. Aside from Obama’s plan, there are others available that struggling graduates in massive amounts of debt can pursue.

What is student loan forgiveness?

The student loan forgiveness programs provided by the government are the Pay As You Earn Repayment (Pay As You Earn) plan, Income-Based Repayment (IBR) plan, and the Income-Contingent Repayment (ICR) plan. The student loan forgiveness qualifications include whether or not you’re a new borrower, your income and your family size. The programs are for people struggling to make their minimum monthly payments on federal loans only. They’re not for graduates with private loan debt. Under them, the payments are lowered and eventually the loans are erased. You cannot be in default on your loans if you want to be accepted into any of these programs.

What are the Pay As You Earn plan, Income-Based Repayment plan, and Income-Contingent Repayment plan?

The Pay as You Earn Plan is also known as Obama Student Loan Forgiveness. According to Dorfman, under this program, “…people with student loans that meet certain income eligibility standards will only need to pay 10 percent of their discretionary income for a maximum of 20 years.”

Discretionary income is any money you earn above what would be considered the poverty line. This is dependent upon the size of your family. In 2014, for one person, the poverty line is $11,670 a year, and for a family of four it’s $23,850. If you earn $23,900 and you have a family of four, that $50 would be discretionary.

If you work in the private sector, after 20 years, any loans left will be forgiven. If you’re a government employee, you only have to pay back for 10 years before they can be forgiven. This plan is only for new borrowers who took out a federal loan on or after October 1, 2007 and/or a Direct Loan (where the school is the lending agency with the federal government providing the funds) after October 1, 2011.

Income-based repayment plans are the most commonly used forgiveness programs. They’ve been around since 2009 and debts are forgiven after qualifying payments are made for 25 years, according to IBR Info. They’re for people who have Family Federal Education Loans as well as Direct Loans. A sliding scale is utilized to figure out how much of your student loans you can pay.

To qualify for the IBR program, “you have to have enough debt relative to your income to qualify for a reduced payment,” according to IBR Info. “That means it would take more than 15% of whatever you earn above 150% of poverty level to pay off your loans on a standard 10-year payment plan.” There are different IBR plans for borrowers who are new and not new.

ICR is also a 25-year plan, except that payments are higher than IBR. You must pay 20% of your discretionary income every month and the interest may be higher than the IBR and Pay as You Earn plans.

Under all three programs, the repayment amounts are reevaluated each year and can change depending upon how much money you make and the size of your family.