In November 2012, the Federal Reserve Bank of New York released its quarterly report on household debt and credit, revealing an alarming figure: 11% of student loan balances are 90 days or more delinquent. Student loan borrowers continue to struggle with repayment, no doubt a result of rising tuition rates and limited job prospects. A new program may help borrowers at risk of falling behind on their payments. President Obama recently introduced a repayment option that combines low payments with possible student loan forgiveness.
Commonly referred to as Obama Student Loan Forgiveness, the program is called Pay As You Earn and it calculates a borrower’s student loan payments using their income and family size. Since payments are not based on your student loan balance, it allows low-income borrowers with high loan balances to afford their payments. Here are a few key elements to the Pay As You Earn program:
- Lower Payments: Eligible borrowers can have their monthly student loan payments capped at 10% of their discretionary income. To get an idea of what a difference this can make, a borrower with $40,000 in student loan debt at 6.8% APR who makes $50,000 a year would pay about $460 monthly on a standard repayment plan. That same borrower would pay approximately $277 on Pay As You Earn. Compared to other federal repayment plans, Pay As You Earn offers borrowers one of the lowest possible payments.
- Student Loan Forgiveness: If a borrower makes consecutive, on-time payments for 20 years, any remaining balance will be forgiven. However, borrowers may need to pay taxes on the forgiven balance.
- Not everyone will qualify: What does it take to qualify? Only new borrowers with Federal Direct Loans will qualify. If you took out a federal loan prior to Oct 1, 2007, you are not considered a new borrower. Also, you must have received a Direct loan after Oct 1, 2011. If you’re not sure when you took out your loans, or if your loans are Direct, you can find out by visiting the National Student Loan Data System (NSLDS). Also, if your student loan defaults, you won’t qualify for Pay As You Earn, so if you’re struggling with your payments you should reach out to your loan servicer right away.
- Total Interest: Since borrowers are making lower payments, the loan will typically take longer to pay off. As a result, borrowers will end up paying more interest on Pay As You Earn than on a standard repayment plan.
President Obama’s Pay As You Earn plan gives borrowers with a financial hardship an affordable student loan repayment option. While the program may be limited in its scope of eligible borrowers, for those who don’t qualify for Pay As You Earn, there are alternatives. Borrowers can visit the Department of Education’s website for more information on repayment options and student loan forgiveness programs.
Qualifications and How to Apply
If you are considering the Pay As You Earn or other federal programs you can get one-on-one advice on your eligibility and step-by-step application directions by talking to a certified, nonprofit student loan counselor. Start by getting a free online evaluation.