Contrary to infomercials, commercials and advertisements appearing online and in the media, there is no such thing as “Obama student loan forgiveness.” It is a fabrication that exploits the desperation of borrowers who are struggling to repay their student loans. The businesses who promote this myth may be trying to convince borrowers to pay a fee for services they could obtain on their own for free.
The most common version of this myth claims that up to $45,000 in federal student loan debt will be cancelled after 20 years in repayment, provided that the borrower has repaid at least 10% of his or her student loan balance. Some versions of the myth require the borrower to have graduated from college. Other versions claim that private student loans may also be forgiven.
This “Obama Student Loan Forgiveness” myth is based on a distortion of three existing loan forgiveness programs and various budget proposals.
- After 25 years of payments (300 payments) in Income-Based Repayment (IBR) and/or Income-Contingent Repayment (ICR), the remaining debt is forgiven. This forgiveness is taxable under current law. ICR is available only in the direct loan program. IBR is available for both FFELP and Direct loans.
- After 20 years of payments (240 payments) in Pay-As-You-Earn Repayment (PAYE), the remaining debt is forgiven. This forgiveness is taxable under current law. This repayment plan is available only in the direct loan program for recent loans (at least one loan disbursed on or after 10/1/2011 and no loans prior to 10/1/2007). President Obama has proposed expanding PAYER to all federal student loans, not just recent loans, but has not yet determined how he will pay for it. Since only Congress can appropriate funds, the President will have to find savings elsewhere in the student loan program to cover the cost of expanding eligibility for the PAYER program.
- In all three repayment plans, if the borrower makes 120 payments (10 years’ worth) while working full-time in a qualifying public service job, the remaining debt is forgiven through the Public Service Loan Forgiveness program. The loans must also be in the Direct Loan Program to qualify. The payments must also have occurred since 10/1/2007 and the forgiveness is not retroactive. This forgiveness is tax-free under current law. President Obama has proposed capping the amount of forgiveness under public service loan forgiveness at $57,500.
None of these loan forgiveness options are called “Obama Student Loan Forgiveness.”