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How To Calculate Student Loan Payments Under New Obama Plan
Millions of former students may see their federal education loan payments drop under a new plan that President Obama is expected to announce in his State of the Union Address Wednesday evening.
The proposal calls for two significant changes to the income-based repayment plan that was passed by Congress in 2007 and introduced in July of last year. Under income-based repayment, borrowers’ monthly loan payments are based on how much a borrower makes, rather than how much student loan debt he owes.
Former students who sign up for income-based repayment currently pay 15% of any income in excess of 150% of the federal poverty line for their family size. That means that a single borrower without children pays 15% of whatever he makes above $16,245 per year.
Under the proposal the president is expected to unveil tonight, borrowers’ payments would be reduced to 10% of their incomes above the levels already in place. For a single borrower with an adjusted gross income of $30,000 who owes $40,000 in student loans, the new plan would drop monthly payments from $170 under the current system down to $115 a month.
In contrast, paying off $40,000 in federal student loans over the standard 10-year period would require payments of $460 a month, assuming a fixed 6.8% interest rate.
The president is also expected to propose that the federal government forgive any balances that remain unpaid after 20 years. That period is down from 25 years under the current system. The government will view any forgiven balance as taxable income for former borrowers who work in the private sector. As with the current rules, former students who go into the public sector will have loans forgiven after 10 years, and the forgiven balance will not be taxable.
Income-based repayment is only available for federal loans such as Stafford loans and Direct loans.
The calculator below will help you estimate your monthly payments under President Obama’s proposal. To use it, you’ll need to know your adjusted gross income, which is a measure used by the IRS to determine how much of your income is taxable after deductions and credits. (This calculator is for a single filer without children.)
Calculate Your Monthly Payment Below: