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The New Pay As You Earn Program For Student Loans

pay-as-you-earnHow many people do you know with crippling student loan debts?  I know too many to count.  Increased student loan debt combined with a lagging job market has created a segment of the population that is struggling to keep up with their monthly loan repayments.

Recently President Barack Obama instituted the new Pay As You Earn (PAYE) loan repayment program to help these new graduates.  As if the world of student loans wasn’t confusing enough, we just got one more.  Let me illuminate this new option for you.

So what is PAYE?  Well it’s pretty simple actually.  The PAYE option allows loan recipients to pay back their loan in monthly amounts based on their income and family size.  The PAYE amount is to be paid over 20 years and is capped at 10% of monthly income. Sounds pretty great, right?

So, who qualifies?  First of all, you must be a new borrower as of October 1, 2007.  Secondly, you qualify if you are considered under partial financial hardship, or that your monthly payments under the PAYE program would be lower than under a standard 10-year plan.  And get this; once you qualify, you may continue to make payments under PAYE, even if you are no longer under a partial financial hardship.  Only certain loans fall under the PAYE umbrella, though.  Direct subsidized and unsubsidized loans count, as do Direct PLUS loans given to graduate and professional students, and only Direct Consolidation loans without underlying PLUS loans made to parents are included.  Sadly, private loans do not qualify for this program.

The new PAYE program is really great, and will help numerous college graduates stay on top of their finances.  Additionally, there are a number of hidden bonuses included with the new program.  If your monthly payments aren’t enough to cover the interest that is accrued, then the government will cover 3 years of interest payments from the first repayment date.  So if you are really hurting, you basically get an interest free loan for the first three years, as long as you are timely on your payments.  Another great feature of this loan is that interest will never capitalize above 10% of the original loan amount. This could make a big difference down the road for a college grad.  Let’s imagine that you have a total loan debt coming out of college of $35,000.  As you pay this off over the next 20 years, the max amount of interest that can be capitalized, or added to the amount of the loan, would be only $3,500.  One more thing you should be aware of: after 20 years of paying your loan debt, the remaining amount is forgiven, and this is reduced to 10 years if you work for the government.  Now, hopefully most college graduates will be able to pay off their loan in 20 years, but if times stay tough for them, the government has added this little caveat to make sure that no one is paying of their college debt during retirement.

Seems totally great, right?  Well, there are some downfalls to the program.  First of all, the repayment period of 20 years is longer than the standard 10-year repayment, which translates to more interest paid over the life of the loan.  If you do wait for the full period to pay off your debt, then when the remaining amount is forgiven, that amount is counted as income, possibly affecting taxes owed.  Due to the monthly payment being based on income and family size, applicants must update annually.  If you default on this requirement, your monthly amount will change to the 10-year standard amount and interest may be capitalized.  Also, FFEL loans are not included under PAYE.

A college education is an incredible thing, but sadly more and more people graduate college in a worse financial situation than when they started.  The new Pay As You Earn program will help these new grads from drowning in their debt and should lead to more people attending and eventually graduating from colleges across the nation.

 About the Author:

Today’s guest article comes from David Fridland, a staff writer for CollegeFocus.  He graduated from the University of Colorado-Boulder with a degree in Political Science.  When not writing, David spends most of his time out on the Ultimate Frisbee Field.

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2 Responses to “The New Pay As You Earn Program For Student Loans”

  1. John Haver says:

    With any good program there is always downfalls. To me I’d have to way the pros and the cons. 20 years vrs 10…I think Id rather pay a little more for the 10 then the 20. At this point people will still being paying for degrees they can’t even use well into their 40’s.

  2. 20 years is a long time to be paying off loans. My question is if you do this program because of financial troubles and then after a while you don’t have any financial troubles do you have to stay on the program or could you start paying more to pay it off quicker?