Understanding Obama’s Student Loan Debt Plan: Will It Help You?

Sorry, it’s not retroactive

First thing to note: It does absolutely nothing to help current borrowers making payments or, worse, those in default and who arguably need the most help. Only borrowers who take out loans in 2012 and going forward will be eligible. So that means no recent 2011 graduates; no one currently making payments now, especially those who are in default on their loan payments, will be able to take advantage of this program.

“Pay As You Earn” plan improves

The “Pay As You Earn” plan will roll out in January 2012, and  it’s based largely on what Congress passed in 2010, the improved income-based repayment plan, that was originally scheduled to go into effect in 2014. It will lower the maximum monthly loan payment to just 10 percent of one’s discretionary income (more on this later), down from 15%. For instance, if you were hitting that cap previously your monthly payments would now decrease by 30%. A limited time consolidation will be made available that will offer a lower interest rate as well as the ability to make one payment for all loans. Any debt remaining after 20 years, both principal and interest, will be forgiven. That’s down from 25 years previously. What could this mean for an average borrower? For example:

“A nurse who is earning $45,000 and has $60,000 in federal student loans. Under the standard repayment plan, this borrower’s monthly repayment amount is $690. The currently available IBR plan would reduce this borrower’s payment by $332 to $358.  President Obama’s improved “Pay As You Earn’ plan” will reduce her payment by an additional $119 to a more manageable $239 — a total reduction of $451 a month.”

What exactly  is discretionary income?

Discretionary income is defined to be the adjusted gross income minus the federal poverty line that corresponds to your family size and the state in which you reside,” according to Finaid.org, an award-winning financial aid education site.
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