Learn About New Rules to Curb Student Debt

Blog Post01/26/2016
Student Loan Advice

The price tag for attending college has risen 1120 percent since 1978, so it’s no wonder students are in more need than ever of debt relief options. The Obama administration has prioritized student debt relief by authorizing a new loan payment program to help millions of Americans manage student loan debt.

The Pay As You Earn (PAYE) program is a repayment plan that calculates your loan payment based on 10 percent of your discretionary income. This gives you the freedom to build your earning capacity without the huge burden of an unmanageable monthly student loan payment.

Eligible Student Loans

Your student loans must have been issued directly from the federal government to qualify for the Pay As You Earn program. Parent and family loans don’t qualify, nor do private loans from banks and other lenders. However, you can use one of the existing student loan consolidation programs offered by the Department of Education to combine your government and private student loans into a single loan product that does qualify for PAYE.

This program is restricted to students who borrowed their first federal student loan after October 1, 2007 and to those who borrowed using a Direct Loan or a Direct Consolidation Loan after October 1, 2011.

The Hardship Requirement

Participants in the program must demonstrate financial hardship, but the program defines hardship in a way that makes this requirement simple and accessible to many Americans. Student loans ordinarily come with a 10-year repayment plan prior to any consolidation. If your monthly payment under this 10-year plan is higher than what you would pay under the Pay As You Earn plan, this satisfies the hardship requirement.

Basically, PAYE considers it an automatic hardship if your student loan payment takes up more than 10 percent of the income you need to live on, called your discretionary income. Your discretionary income is determined by taking your adjusted gross income (AGI) — which you calculate on your federal tax return — and subtracting the federal poverty guideline amount for your family size.

For example, take a single graduate with no children, who’s working as a teacher and making $38,000 in adjusted gross income. She would then subtract $11,770 from that $38,000 to accommodate the 2015 federal poverty guidelines for a family of one, making her discretionary income $26,230. If the student loan payment for this teacher is more than $262 a month, the teacher meets the hardship requirement for the PAYE program.

Payments Based on Discretionary Income

Current income-based payment plans offered by the Department of Education cap payments at 15 percent of a borrower’s discretionary income. One of the main benefits to PAYE is that the cap is set at 10 percent instead, making your payment lower and giving you more income to live on as you pay off your debt.

Unique Benefits of PAYE

PAYE provides significant student loan help that goes beyond the reduction of your monthly payment. First, you need only prove hardship to get into the program. If your income rises in the future so your payment under the 10-year repayment plan is no longer more than 10 percent of your discretionary income, you don’t get kicked out of PAYE. Instead, your monthly payment under PAYE adjusts to 10 percent of your new discretionary income level.

PAYE also includes safeguards to ensure that a lower monthly loan payment doesn’t result in you owing more money because the loan payment doesn’t cover the accruing interest. The government pays any unpaid accrued interest on subsidized Stafford loans for up to three years under PAYE if you’re in financial hardship. Other unpaid interest gets added to the balance of the loan but is capped at 10 percent of your original loan balance.

If your financial situation changes and you’re able to make more than the minimum payments, you should contact your loan servicer and submit your updated financial information to have your payment amounts adjusted. Regardless of whether or not there have been any changes to your income, income-driven loans require you to recertify once a year to confirm your income and family size. The PAYE program is very flexible and – individual lenders can decide the terms of the loan repayment under the program.

PAYE offers loan forgiveness for borrowers who work full time for public service organizations and make 120 on-time payments. The program also allows borrowers to apply for loan forgiveness after 10 or 20 years of repayment under certain circumstances. This new income-based loan program makes it possible for you to get out from under your student loans eventually so you’re not paying them into old age.

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