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.)
Finally, if you're already in default, then you won't qualify.
The Reach Rethought
First, considering that this will really only apply to graduating seniors and maybe a handful of graduate students, we can re-think the average case. But that's because the pool we're talking about now is much, much smaller than I had previously thought. I had initially believed that anyone with student loans could potentially benefit from this program, which led me to use the decade average student loan burden (~$21,760).
Instead, the much tinier pool would more aptly be characterized as having an average student loan balance of $28,720, according to projections I've seen. Student loan interest rates are also much higher now than they were earlier in the decade, in the ballpark of 8%. With those assumptions, a single person making less than $45,000 would begin to see some savings. That's about the median earnings for a young adult with a bachelor's degree, according to the Department of Education, which implies that as many as half of graduates could potentially qualify for the program.