Borrowers who hope to save the most from the president's executive orders will look to this provision -- but it only applies to those who take loans for education in 2012 or later
With a splashy headline yesterday, I revealed that the farthest reaching aspect of President Obama's executive order to help student loan borrowers would save the average person less than $10 per month. I also commented on the other two aspects of the plan, which I observed also wouldn't help most Americans with their student loans. That is all correct, but some additional nuances about the 10% payment cap that have been brought to my attention are worth explaining better.
This aspect of the new law attempts to relieve students with relatively high student loan costs and relatively low incomes. It does this by capping student loan payments at 10% of a person's discretionary income. Even the basics of this calculation are complicated, so please bear with me. (And check out this website for additional information.)
To calculate your eligibility, you must figure out your discretionary income under the definitions of the law. This is calculated by taking your gross income and subtracting 150% times the poverty line.
For example, in 2010 for a single person, the poverty line is $10,890. Multiply that by 150% and you get $16,335. If you're single, subtract that number from your gross income. For example, let's say you make $40,000 per year. Your discretionary income per this law would be equal to $23,665.
Under current the old system, you would multiply that by 15% to get the maximum annual student loan payment you would be required to make. That's $3,550 or $296 per month.
Under the new law, the calculation would be almost identical. The difference is that the cap is now at 10%, instead of 15%. That makes your annual maximum student loan payment $2,367 or $197 per month. You could pay up to $100 per month less in this example, compared to the old system.
That is, if you have enough student loans. Remember, if your student loan payments are smaller than that maximum, then the law doesn't help you. In the scenario above, you would need to have graduated with loans in excess of about $28,000 (assuming a 6% interest rate and a 20-year term) before you see any payment reduction.
Now even if you appear to qualify for a payment reduction according to those calculations above, you still might not. There are a few more things you need to know.
First, the loans we're talking about aren't just any loans. They're direct federal loans or government-guaranteed private loans. If some of your loan balances are purely private, then subtract those out from your total balance to see if you qualify. And the payment reduction would only apply to what you pay on your government-backed loans.
Second, whether or not you can benefit from the new 10% cap depends on when you took out your first student loan. You may qualify if:
- You took out all of your loans in 2012 or later (future students)
- You took out the loans in question after 2008 and a loan after 2012 (mostly current students)
So if you graduated college in 2011, then you don't qualify. (But you could still qualify for the 15% cap. I'm just considering Obama's executive order here.)