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An Overview of Obama’s “Pay As You Earn” Loan Forgiveness Program

Student loan debts are whacking college graduates. Defaults are soaring to new record highs. Borrowers have requested debt relief. But President Obama has a faster government-sustained loan consolidation and loan forgiveness plans that help borrowers pay back their college debts, and boost the U.S. economy at the same time.

Called the “Pay As You Earn” program, the plan has three key features:

Repayment Term

Every loan that is consolidated will keep its original repayment term. Hence, borrowers will be paying less interest within the life of the loan than they would under a traditional consolidation plan.

Interest Rate

This will a flat rate (must not be higher than 8.25%) following the application of the 0.25% cut in interest rate on qualifying loans for consolidation. Reduced interest rates mean that a larger part of the monthly payment will be going to the principal amount owed.

Electronic Debit Payment

Those who apply to this new consolidation plan are will be given an additional 0.25% interest rate cut if their loan is repaid via the automatic debit system of the Department of Education.

The government wants to give people the opportunity to consolidate all their debts, both private and public, into a single new government loan. Such a move can cut their interest rates, and let them save money in this income-based repayment program of the federal government.

College graduates will still have to keep paying, but the revised payments will be capped at a mere 10% of their income. Above all, those with college loans amounting to tens of thousands of dollars will be automatically forgiven after the 20th year.

This program will obviously help millions of graduates all across the country who are still struggling to repay the money they spent to complete their college education. When Congress approved the Income-Based Repayment Plan (IBRP) in 2010 – the law which reduces the monthly payment to 10% of discretionary income, and would erase all student debts after 20 years – there was a long wait before it was finally implemented. Low-income borrowers stand to reap the most benefit.

Benefiting the most are low-income borrowers. When a student loan borrower qualifies, the monthly payments will be based only on any income that exceeds 150% of the poverty line.

For a graduate who is living independently, IBRP payments are to be paid based on his or her income. On top of that, if the graduate is unemployed and has no income, he or she is not obliged to make payments at all.

This new debt relief plan represents a welcome step forward in terms of resolving the problem that hounds untold numbers of college graduates who, after graduation, are finding it hard to cope with their college debt repayments.