Students who borrow loans from the U.S. government to help pay for their education now have a new option when paying off their debt called the Pay As You Earn Repayment Plan, which will lower monthly federal student loan bills for eligible borrowers.
First announced by President Barack Obama in October 2011, Pay As You Earn caps payments for Federal Direct Student Loans at 10 percent of discretionary income for eligible borrowers. The U.S. Department of Education estimates that as many as 1.6 million Direct Loan borrowers could reduce their monthly payments, including teachers, nurses, first-responders and other lower-paying public service workers.
“We know many recent graduates are worried about repaying their student loans as our economy continues to recover, and now it’s easier than ever for student borrowers to lower monthly payments and stay on track,” said U.S. Secretary of Education Arne Duncan in a press release.
To qualify for Pay As You Earn, a borrower must have a partial financial hardship as defined by the U.S. Department of Education. A person has a partial financial hardship if their payments under a 10-year Standard Repayment Plan are higher than the required payments under the Pay As You Earn plan.
A student must also be a new borrower as of October 2007 and the federal student loan debt must be high relative to the borrower’s income. The monthly payment amount is partially dependent on income and family size.
Under Pay As You Earn, a borrower may be eligible for 20-year forgiveness, which forgives any remaining student loan debt after 20 years of qualifying repayments. Furthermore, if a borrower is employed full-time by a public service organization and makes 10 years of on-time payments, they may be eligible to receive forgiveness of the remaining balance of their direct loans through the Public Service Loan Forgiveness Program. Any forgiveness of loans, though, is subject to taxation.
Because reduced payments under the plan mean repaying loans for a longer period of time, the total interest over the life of the loan will be higher than it may be under other repayment plans. However, if the monthly payment does not cover the interest that accumulates on the loans each month, the U.S. government will pay the accumulated interest for up to three years.
Ed Blaguszewski, Executive Director of News and Media Relations at UMass Amherst, said that the university fully supports Pay As You Earn and thinks that it will be helpful for students looking for a repayment plan that better suits their needs.
“Even for students that may not need 20 years, this could be helpful,” he said.
Blaguszewski said that Financial Aid Services only distributes loans, and it is the responsibility of the student to repay any loan debt left with them at the end of their education at UMass.
“We don’t say to students, do you want to repay the loan with the new plan or the old one,” he said. Blaguszewski added, though, that this new plan is something that students may want to look into.
Pat Hoff can be reached at firstname.lastname@example.org.