Are you eligible for the Pay As You Earn plan?

On June 9, 2014, President Obama signed an executive order that will make it easier for millions of young borrowers to repay their federal direct student loans.

The Pay As You Earn plan will help relieve student loan payers. (Credit: Deviant Art)

The Pay As You Earn plan will help relieve student loan payers. (Credit: Deviant Art)

With average student loan debt hovering around $30,000 per student and total student loan debt outpacing total credit card debt, borrowers will welcome the new ‘Pay As You Earn’ repayment program. Under the program loan, payments change based on your income and family size.

Pay As You Earn

Pay As You Earn has been around for a few years but only applied to borrowers who took out loans after October 1, 2007, and who received a loan after October 1, 2011. This order expands the eligibility window for borrowers and now applies to loans that originated before October 2007 or to those who have not borrowed since October 2011.

For these borrowers, however, it may take until December of 2015 for the new guidelines to finalize that allow them to participate in Pay As You Earn.

In a June 9, 2014, article for NYTimes.com, “Obama, Noting Own Student Debt Burden, Expands Repayment Cap and Pushes Bill,” Mark Landler described the president’s rationale for the order.

In describing his passion for this executive action, the president described how mounting debt keeps young people from pursuing their dreams and building their lives and careers.

“Mr. Obama drew on his own financial history in promoting the measure. He told the audience that he and his wife, Michelle, paid off their law school loans just 10 years ago, after they had already begun saving for their daughters’ college educations,” Landler reported.

President Obama also seeks to renegotiate contracts with lenders such as Sallie Mae to increase incentives for paying off loans.

Federal student aid

More on how Pay As You Earn works can be found in Katy Murphy’s June 15, 2014, article for MercuryNews.com, “Help coming for student-loan borrowers, White House says.”

Key features of Pay As You Earn include:

  • payment cap: payments are capped at 10 percent of discretionary income, which is calculated as adjusted gross income minus about $17,500 for a single person and about $23,600 for a family of two
  • forgiveness: those who stay on the program for 20 years will have the remainder of their loans forgiven; those who take jobs in the public or nonprofit sectors will have their loans forgiven after ten years
  • adjusted payments: payments fluctuate with salary and family size
  • interest payment: if your monthly payment doesn’t cover all of the accrued interest, the government will cover the shortfall for up to three consecutive years from the date you began repaying your loan

“In a White House example, the monthly payments on $26,500 direct federal loans for a teacher earning $39,000 a year would drop by $126 under Pay As You Earn, compared with a traditional repayment plan,” Murphy said.

Pay As You Earn Student Loan Calculator

You can learn how the Pay As You Earn program works at StudentAid.Ed.gov. If your loan payments as calculated under a 10-year standard repayment plan are higher than what you would repay under the Pay As You Earn plan, then you should qualify.

To determine your eligibility, count any of your payments on the following types of loans:

  • all William D. Ford Direct Loan Program Loans
  • subsidized and unsubsidized Federal Stafford Loans
  • Federal PLUS Loans to graduate students
  • Federal Consolidation Loans that did not repay any PLUS loans for parents

Use the Repayment Estimator to estimate your federal student loan payments under each repayment plan.

While certain loans will qualify you for the program, the list of loans that are eligible for Pay As You Earn is limited to the following:

  • Direct Subsidized Loans
  • Direct Unsubsidized Loans
  • Direct PLUS Loans made to graduate or professional students
  • Direct Consolidation Loans without underlying PLUS loans made to parents

Notice that this list does not include private education loans, or FFEL program loans. Nor does it include Direct PLUS loans made to parents.

Final thoughts

Pay As You Earn isn’t a perfect solution to the student debt crisis, but it’s a start. Not all loans can be repaid under this plan so you’ll have to explore other programs such as the Income-Based Repayment Plan for those loans that don’t fall under Pay As You Earn.

To apply for Pay As You Earn and to check out other payment plans go to StudentLoans.gov.

Are you worried about paying back your student loans? How do you think this ruling will affect you? Tell us your thoughts in the comments.

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