in Personal Finance

How President Obama’s Student Loan Forgiveness Act, 2012 Works

Repayment of loans has been a major hurdle in the lives of students. While some resort to taking up odd jobs to repay their dues, others simply fall in the debt trap. President Obama, therefore keeping in mind these hardships has introduced the Student Loan Forgiveness Act which concentrates majorly on IBR (Income Based Repayment) under the federal loan category.

IBR is a scheme which caps your required monthly payments for your loan according to your income and family size. This monthly payment was initially at 15% of your income which had to be paid within a period of 25 years. But considering the over 1 trillion debt created by the non repayment of loans by US graduates leading to a decline in the growth of the economy, the scheme has scaled down the monthly payment to mere 10% for a period of 20 years.

Obama Student Loan Forgiveness Act, 2012

Obama Student Loan Forgiveness Act, 2012

For example consider your earning to be $50,000 a year with $40,000 in federal education loans. Using the 2009 poverty line of $10,830 for the continental US, the monthly payment cap under income-based repayment will be:

15% * ($50,000 – 150% * $10,830) / 12 = $377.55 a month.

But with the introduction of the new rates, the monthly payment cap will be:

10 % ( $50,000 – 150%* 10,380) / 12= $281.29 per month.

Thus you save $96.26 each year/ This amount can be paid within 20 years, if the repayment is due your debt is forgiven.

President Obama also emphasized on the need to spread the word about this scheme and has directed the Education Board and the IRS to make students aware about the programme. Thus using the medium of developed web and various mobile applications students can avail these loans.

Another important factor of this act is that Public Service Loan Forgiveness has been cut down to 60 monthly instalments instead of 120 instalments which had to be paid in the proceeding 10 years, each month. This is only applicable for those borrowers who serve for public services.

The act also ensures that all the federal loans are capped at a minimal interest rate, that is of 3.4% which is rather low than the expected hike we may see in latter half of this year.

The recent study held by Rutgers University found that only 53% of student graduates are having permanent jobs thus leaving almost around half of the young economy jobless and in the cages of loan repayment. With a view to improve the stability of the economy the student Loan Forgiveness Act,2012 also aims at helping borrowers to convert their private loans into federal loans. This gives them a benefit of availing the loans at a lower rate of interest.

Admist this fiasco what people forget is that any kind of forgiveness or a refund is generally included as taxable income barring a few exceptions. So obviously after 20 years down the line if you are unable to pay your taxes this will further add on to the debt of the country.

With the presidential elections coming closer congressmen have began to feel the heat, and President Obama is leaving no stone unturned to do his best for the economy and get his work in the eyes of the people. But is this an attempt to gain student votes? Or is it a mere attempt to bring out  a real change? Only time will tell.

Image Credit: Flickr, portobellospy

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  1. Need to speak to someone directly about student loan forgiveness and current laws. I owe $35000 to Sallie Mae and have been paying for five years. I have been teaching children with disabilities for 5 years as well…but four out of the five years have been in a private school that teaches children within the autistic spectrum.

    Thank you

  2. I’m right there with you, Abby! I work at a public school and have taught in the area of Special Education for 5 years, but I can’t qualify for Teacher Loan forgiveness, because I don’t teach at a TITLE I school. I agree these current laws need to be changed! Great educators are leaving the public service industry and high need areas, such as special education, because they can’t afford to teach and pay back their loans! So why is it that if I teach at a TITLE I school and teach Special education my loan can be forgiven for up to $17,500.00? But I dont qualify for the teacher loan forgiveness program as special educator, because I don’t teach at a school that is considered a Title I school. Do the students I teach at a REGULAR public school not have the same intense needs as those at a TITLE I school? Law makers need to remember who we are really trying to help here! Aren’t special education teachers in all schools (economically advantaged or disadvantaged) working to improve the academic achievement of the disadvantaged?
    Please refer to the following

    Sec. 1001 Improving the Academic Achievement of the Disadvantaged
    (2) meeting the educational needs of low-achieving children in our Nation’s highest-poverty schools, limited English proficient children, migratory children, children with disabilities, Indian children, neglected or delinquent children, and young children in need of reading assistance.

    Let’s see as Special Education teacher in a public school I not only teach students with disabilities, I also teach limited English proficient students (not just spanish speaking), children with disabilities, young children in need of reading assistance (children with a learning disability in the area of reading/dyslexia), and neglected children.
    So why is it that I don’t qualify for Teacher Loan Forgiveness Program?

    • Hi,
      Very valid point made by you. I respect the work you are doing and even I feel you should qualify for Teacher Loan Forgiveness Program. Thanks for sharing your views and question here.


  3. I have been paying on my student loan automatically since 2000. I have worked for the Los Angeles County of Office of education as a substitute teacher full time for five of those years and then for Los Angeles County Probation Department full time up until now. I have about $25,000 more of my loan owed. How can I get this debt forgiven earlier than 2017?