As spring turns in order to summer, the minds of many brand new college graduates turn from elation over graduation to anxiety over impending student loan payments. As a College Coach finance instructor , and former college aid counselor, I’ve spoken with countless graduates over the years who express exactly the same sentiment: when they signed for those student education loans each academic year, they understood they would have to pay the loans back. Somehow, though, those payments did not seem quite real until graduation day came and the student loan expenses actually were on the way. That’s when loan amounts that may have got seemed reasonable in the abstract may become overwhelming, especially when comparing minimum monthly obligations to first full-time paychecks.
New Student Loan Repayment Strategy Caps Payments at 10% of Income
Happily, upon December 21, 2012, a new education loan repayment plan became available that may supply repayment relief to some of these stressed borrowers. The plan, known as Pay As You Earn (or PAYE ), caps federal student loan payments at 10 percent of the borrower’s (and spouse’s, if applicable) discretionary income, which is defined as income above 150 percent of the federal poverty collection for the borrower’s household size. PAYE eliminates the hardship of fairly large monthly payments that eat up an entire paycheck for lower-income borrowers. Furthermore, any remaining loan balances are cancelled after 20 years of repayment on the Pay As You Earn plan, though cancelled balances are viewed as taxable income. Students doing work in public service are eligible for loan forgiveness after 10 years with no tax liability.
A great relief to borrowers with high loan balances compared to their income, the devil with PAYE is, not surprisingly, in the details. There are many limitations regarding which borrowers and loans qualify for PAYE.
PAYE Loan Repayment Plan Restrictions Include:
- A graduate must be a new borrower of federal student loans as of October 1, 2007, plus must have received a brand new loan disbursement after October one, 2011, to be eligible for PAYE. The program therefore only applies to recent and future graduates—earlier borrowers never qualify.
- Eligible borrowers must be experiencing a partial financial hardship . A partial monetary hardship exists when payments upon qualifying loans under a standard 10-year repayment plan would be higher than payments calculated under PAYE (i. e. loan balances must be high in relation to income). Borrowers can utilize the Department of Education’s PAYE Calculator to see if they qualify, and income must be documented each year to retain eligibility.
- Only loans borrowed with the government’s Immediate Loan system, including Direct Subsidized and Unsubsidized Loans, Direct Graduate PLUS Loans, and Direct Consolidation Loans, are eligible for PAYE repayment. All federal student loans borrowed since July 1, 2010 have been issued with the Direct Loan program, but older student loans may have been borrowed from a bank through the government’s Federal Family Training Loan (FFEL) program. Old FFEL loans can be consolidated to the Direct Loan program in order to obtain PAYE eligibility.
- Parent PLUS Loans (and Consolidation Loans including Parent PLUS Loans) do not qualify for PAYE repayment. Therefore , parents struggling with payments upon loans they borrowed on behalf of their own undergraduate children cannot benefit from the repayment relief offered by PAYE. Note that one more (less generous) repayment plan, Earnings Contingent Repayment, may be available to parent borrowers.
Though restricted in its implementation, the PAYE plan can certainly provide repayment relief for many recent borrowers. Student loan payments capped at a small percent of income can alleviate a few of the repayment stress that is experienced by brand new graduates, often facing larger than expected loan payments and smaller than expected starting salaries. Borrowers interested in applying for PAYE repayment can do so on www.studentloans.gov .