There was legislation passed under President Obama in 2014 which aims to cap the amount student loan borrowers will have to pay out each month for their federal or private student loans.
Rightly or wrongly, it is often referred to on the web as Obama student loan forgiveness, often times this term is thrown around in order to get quick clicks for advertisements to be perfectly honest, and there little in the way of hard facts are addressed, this is not one of those instances.
The reality is that real student loan forgiveness programs are few and far between; do not be under any illusions. This new legislation does, however, provide real relief on the back end of the loan, which is something we will get to in short order. The main point to consider is: is this relief going to be towards your benefit or will it be a sucker punch? Everyone’s personal situation and solution will be slightly different.
The intention of the law is to not place undue burden on our country’s college graduates, especially in economic times where personal debts are at a very high level; it is sound in principle. The fact is that more and more people are going to college, in fact the number of college graduates in the U.S. over the past decade is up well over 30 percent, and with that increase in students comes a lot of new debt.
Now, the question is, is this a good thing or bad thing in reality? How will it play out in practice? Will this legislation survive economic and political winds of the future? And will the law remain in place without amendments in the long term?
Much of this remains to be seen and a good debt strategy vary from individual to individual, so common sense economic principles should always be our best guide, and will be in this situation as well.
The devil is always in the details, as you probably know, it is in the elusive fine print. You need to know broader principles and apply them, as well as take your entire economic picture into account in order to deal with student loan debts with the utmost effectiveness. Continue reading to find out if Obama’s student loan forgiveness plan may benefit you.
Paying Down Loans Early is a Timeless Principle That Always Pays Off in the End
Let’s look at it this way, if you take out a 40 year mortgage on a home even at a very low interest rate you are going to pay way more in interest over the life of the loan, if you stick the payment schedule as it is, it is just so darn long. This principle is immutable and is like a law of physics, it is unavoidable and must be addressed from the outset or you may be in for a big surprise come retirement time.
The same is true with student loans, so lowering that monthly payment may feel wonderful for your pocket book in the short term, however over many years you may find your savings are dwindling more than if you had paid off those loans sooner. It will vary on a case-by-case basis how fast you want or need to pay down your debt, and the new legislation does play a factor; one of the incredibly faulty assumptions though is counting on the fact that this legislation will stand and that it won’t change and adjust over time. Those are real questions, and we, as borrowers simply do not have control over these very important variables.
More Specifics of Obama Student Loan Forgiveness
Obama’s student loan forgiveness legislation fully kicked in at the end of the year in 2015; however, the terms only applies to new loan borrowers at first. If you took out loans before 2007 or stopped borrowing in 2011, you will become eligible for this program within this time period, so, of course, you need to take your own personal situation into account and see if this applies to you.
The cap of your student loans will be based on your income, so the less you earn the less you will pay back each month, which is certainly fair and to be applauded. This is put into place to make sure that an increase in debt default does not get out of hand, and that is smart politics and economics in the short term.
The cap limit is 10% of your income level every month. Sometimes it hurts to make more money, but if you are able to use your money wisely, you can always start paying down that debt faster. If you’re able to do this you will end up paying much less than if you let it go for a longer period of time. It is always better to pay faster, and though it will cost you more if you earn more, you are also paying down your debts at a faster rate. (So, choosing a career that pays well from the outset is obviously something to seriously consider.)
Obama’s student loan forgiveness law, as it is written right now, does state that after a twenty-year period of paying off your loans the remainder can be removed from the balance sheet.
However, the way the political landscape appears as well as the national debt, we find it impossible to determine if this will stay in place as written in the long term. As written, the law states that after 20 years of payments at a certain level of income the remainder of the loan balance will be wiped out.
Sounds good, right? As written, this is the loan forgiveness part of the legislation, however if you pay down your debt over a 20 year period instead of at a faster pace there is a chance that you will in fact pay more, so the game is all about the long term and what you pay out over time.
Sound Financial Advice in Any Economy With Regard to Student Loan Repayment
So, what if you had paid down those student loans faster, in say 10 years instead of 20 as the new law allows? How much less would you have paid out in interest to the government?
It is often a substantial amount of money, and remember, one big caveat here is don’t be suckered into counting on the law of the land of stay the way it is, especially with the current economic and political system and to impress upon each and every one of you that the smart move is to always pay down the debt as fast as humanly possible. This will always be the smart play.
If you’re a homeowner or you pay attention to late night infomercials you will be familiar with programs that eliminate debt for homeowners much faster than is normally possible with a normal repayment schedule. This generally involves sitting down and looking at the family budget and finding ways to cut spending as well as speeding up debt repayments.
Even extremely small changes in a budget can lead to amazing savings when it comes to loan repayments. But there is yet another extremely important angle to look at and that is other debts in the budget. The entire debt picture will determine what you need to do with your student loan debts.
Student loan debts are generally low interest debts, and low interest debts will obviously not suck as much money out of your pocket as high interest debts. What are generally high interest debts? Well, the two most obvious ones are credit card debt and auto loan debt, and of course, these are debts that almost everyone falls into during or just after their college years.
Credit card debt is, as some of your know, the biggest killer of a financial life in the history of mankind. So, what is a student loan borrower to do? The best course of action is to pay your high interest debt down as quickly as possible, and to also do not accrue much of this debt. This is easier said than done, but it is an absolute must.
You’d be surprised at how much more money you will have at the end of the day when you simply get rid of your car payment and pay down one of your high interest credit cards. Once you have you high interest loans paid down, is that the proper time to attack student loan debt? Maybe yes, and maybe, no, it really depends.
Your personal finances are like an institution’s finances, you need to be able to weather bad economic times. And this generally means saving up 3 to 6 months of income after paying down your high interest debts. Then it’s time to start attacking your low interest debts, but only then. If you can’t weather a bad economic time you will be in much greater peril and you’re putting yourself in danger of default.
And yes, it will help you to knock down your total student loan debt if you pay it off earlier, there is generally no pre-payment penalty with these types of loans. What does that mean exactly? Well it simply means that you can pay the loan down faster and you won’t incur any type of additional fees. Yes, it may seen hard to believe for the uninitiated but with some other loans this is a possibility, it is generally the feature of a very poor home loan, traditionally.
Political and Economic Realities to Consider
The sad reality of our economic reality in the United States is that there is an enormous amount of debt, and this is at the state and federal level. This debt has to be paid down or it will become unsustainable. President Obama has tried to come up with a plan for this by using student loan forgiveness but it is yet to be seen if it will work.
There is roughly one trillion dollars in student loan debt floating around out there right now, and the government sure as heck wants to get that money back and with a decent return. Yes, it does not want to put undue burden on students this is true, too much debt will always back fire with excessive defaulting, as is what happened with the financial crisis in 2007- 8.
The government, with this new Obama student debt legislation is hedging their bets; it is in their interest to lower debt payments in the short term to decrease the amount of defaulting loans. However, in the longer term, if the federal debt is not dealt with effectively, the government can and probably will want to renegotiate things. This is the way of politics and economics.
We can see the same kinds of things going on the world of public unions, as the state budgets get tighter, the states want to take away teacher benefits. This can easily turn on student borrowers as well. The government will always have the upper in hand in these cases because they hold all the cards.
There is additional legislation that has not been passed yet which would allow for easier and more favorable student loan debt restructuring in the near future. This could lower interest rates and give even more relief, however, legislation is something we don’t have any control over. For borrowers with bad rates it behooves you to closely follow these types of bills in Congress, as they will directly effect you, so keep an eye on the financial and economic news the best you can.
Strategies for Lowering Student Loan Debts From the Get Go
We have a very high level of control over our personal budget, and the amount of money that we borrow.
We also have choice over our career path as well. It’s simple things like these which students need to be focusing on more than relief from student loan debt from the government. This can easily be a house of cards depending on how the political winds blow and how the overall debt structure of the United States federal government plays out. We have almost zero control in these arenas of state. President Obama’s student loan forgiveness plan is a way for the federal government to help.
The biggest thing we can do is take out as little debt as possible, and this might be as simple as going to a more affordable college as well as working part time to save money while at school. This is the stark reality of the situation, it is not what many want to hear, but it is the straight truth. If you can take out less than the average student loan debt of $27,975, then you’ll be in a good starting place.
It all comes down to planning for the long term and looking closely at your very personal debt picture. President Obama’s student loan forgiveness efforts are simply one piece of a much more complicated pie. The long and short of the whole debt solution is to pay down debt as fast as you can and to live beneath your means, if we can do this, we stand to retire in a way that befits our mighty efforts, if we don’t we will struggle, it is that simple.
Author: Dave Rathmanner
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