In the Obama Student Loan Forgiveness program, interest in the IBR does not capitalize on the subsidized portion of your Direct Loan. This applies only for the first three years of your IBR payment, and only if your IBR payment is less than what is normally due in interest. This can amount to many thousands of dollars depending on your loan balance and what type of payment you currently qualify for.
Example: Borrower owes $40,000 in Subsidized loans. The interest rate is 6.875%, and the term is 25 years. Borrower is single with an adjusted gross income of $25,000/yr. The interest on this loan would normally be $229.17 per month, but the borrower would qualify for an IBR payment of $93.69. In this case, the borrower would be forgiven $229.17 – $93.69 = $135.48 of interest per month. If this persons financial situation does not change for three years, they would be forgiven $135.48 x 36 = $4,877.28.
Student Loan Forgiveness At The End Of The Term
If you enroll into either the Income Contingent, Income Based, or Pay As You Earn repayment plans, you loan balance would be forgiven at the end of the term if you still have a remaining balance. The term of the loan would be between 20-25 years depending on which repayment plan you choose, and when your loans were originally borrowed. How much you will forgiven will depend on your original loan amount, how much you are earning, and how much your earnings fluctuate during your repayment term.
Example: Borrower owes $85,000 in federal student loans. The interest rate is 6.875% and the term is 25 years in the Income Based Repayment Plan. The borrower is currently earning $35,000 per year, and expects their income to stay the same for the term of the loan. This borrower would qualify for an IBR payment of $218.69, and assuming the income doesnt change, would make these payments for 25 years or 300 payments. The total amount the borrower would pay on this loan is 300 x $218.69 = $65,607 of the original $85,000 that was borrowed. This person would qualify for $19,393 in student loan forgiveness after making those qualifying payments. This does not include the interest that is being forgiven as the borrower would normally pay much more than the original debt due to the interest on the loan.
Public Service Loan Forgiveness
Payments made in the Direct Loan program in an IBR, ICR, or PAYE repayment count as qualifying payments for those who work in the public sector and would like to apply for public service loan forgiveness. In the public service loan forgiveness program, you may qualify for forgiveness after 10 years or 120 payments instead of the standard 20-25 year forgiveness. Unfortunately, many people are not aware that they must be in the Direct Loan program and in one of the correct repayment plans to qualify for this forgiveness. The public service loan forgiveness program is also quite often confused with the term Obama Student Loan Forgiveness.