Update: Registration begins 12/21/2012: The "Pay as you earn" repayment plan spells relief for federal student loan borrowers

December 3rd, 2012 by Ken 1 Comment »

UPDATE: Program enrollment for the “Pay as your earn” program is expected to begin 12/21/2012.

For many former students, November marks the end of the 6-month grace period on Stafford loans since graduating from college in May, and December is when first payments are due. This is normally a time to begin spreading holiday cheer, but when a big payment is due spirits can deflate.

All subsidized and unsubsidized Stafford loans begin repayment after the 6-month grace period is over. This is also true for many private loans as well. While cuStudentloans offers a private loan consolidation to assist in the repayment of private loans, this does not include the federal loans that are handled separately.

Federal student loans offer a wide variety of repayment options that can help reduce minimum payments due, providing a boost to a monthly budget that may be limited post-college. Through government backed subsidy, a loan period can be stretched beyond the normal 10 year repayment term and can modify (reduce) the minimum payment to reflect income.

The new “Pay as you earn” loan repayment plan has been recently made available to help borrowers manage a budget with a more reasonable payment amount. Here are some highlights from the Government website.

How do I qualify for Pay As You Earn? The applicant must demonstrate they have a partial financial hardship. A partial financial hardship is present if the monthly amount the borrower is required to pay on eligible federal student loans under a 10-year Standard Repayment Plan is higher than the monthly amount required under the Pay As You Earn program.

What loans are eligible for this program? Only certain federal Student loans can be eligible for this program. They include…

• 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

This program is for more recent loan disbursements: The applicant “…must have received a disbursement of a Direct Loan on or after Oct. 1, 2011.”

The applicant must be defined as a new borrower as of Oct. 1, 2007: The Department of Education defines a new borrower as an individual having “…no outstanding balance on a Direct Loan or FFEL Program loan as of Oct. 1, 2007, or had no outstanding balance on a Direct Loan or FFEL Program loan when you received a new loan on or after Oct. 1, 2007.

What loans are NOT eligible?

• Direct PLUS Loans made to parents
• Direct Consolidation Loans that repaid PLUS loans (Direct or FFEL) made to parents
• FFEL Program loans
• Private education loans

How are monthly payments modified? The following are considered when modifying monthly payment amount under the “Pay As You Earn” program:

• Total income and family size
• Subject to adjustment each year based on changes to your annual income and family size
• Payments under “Pay As You Earn” should be lower than payments under other plans
• Payments under “Pay As You Earn” should not be greater than the 10-year standard repayment amount
• Payments under “Pay As You Earn” can be made over a period of 20 years.

Features of the “Pay As You Earn” program:

• The monthly payment amount is reduced to 10 percent of discretionary income: This payment amount is less than the minimum payment under the 10-year Standard Repayment Plan, and may be less than other repayment plans.
• An interest payment benefit is available: If the monthly Pay As You Earn payment amount doesn’t cover the interest that accrues (accumulates) on outstanding loans each month, the government will pay the unpaid accrued interest on any Direct Subsidized Loans (and on the subsidized portion of your Direct Consolidation Loans) for up to three consecutive years from the date that loan repayment began under “Pay As You Earn.”
• Capitalization of interest is limited: If the borrower is determined to be under a “partial financial hardship”, any interest that accrues but is not covered by loan payments will not be capitalized, even if interest accrues during a deferment or forbearance. Unpaid interest capitalizes if the borrower is determined to no longer have a partial financial hardship, but the total amount of interest that capitalizes during repayment under the Pay As You Earn plan is limited to 10% of the original principal balance when beginning paying under Pay As You Earn.
• 20-year forgiveness: If you repay under “Pay As You Earn” and meet certain other requirements, any remaining balance will be forgiven after 20 years of qualifying repayment.
• 10-year public service loan forgiveness: If, while you are employed full-time for a public service organization, you make 120 on-time, full monthly payments under Pay As You Earn (or certain other repayment plans), you may be eligible to receive forgiveness of the remaining balance of your Direct Loans through the Public Service Loan Forgiveness Program.

Potential program disadvantages:

• Potential increase in interest costs: A reduced monthly payment under Pay As You Earn generally means you’ll be repaying your loan for a longer period of time, so you may pay more total interest over the life of the loan than you would under other repayment plans.
• Annual review of income documentation: Each year, the loan servicer will need to review your financial information. This will be done most likely through submitting a copy of a recent tax return. The servicer would then calculate the monthly loan payment due to 10 percent of discretionary income considering total income and family size. If this documentation is not submitted, the loan servicer will adjust the payment to reflect standard 10-year repayment, a much larger payment. If you do not provide the required income documentation, unpaid interest will also capitalize normally.
• Only Direct Loans are eligible for the Pay As You Earn repayment plan: FFEL Program loans are taken into account when determining whether you have a partial financial hardship, but are not included for a reduced monthly payment under Pay As You Earn. Loans in FFEL may select another repayment plan, such as Income-Based Repayment.
• Tax liability at the end of term: You may have to pay taxes on any loan amount that is forgiven after 20 years.

Want to find out what your payment would be if qualified for this program?

Since this program is very new, a very small number could have possibly registered for it. However, as more students graduate from college, this plan will become more widely recognized.

Check out the “Pay As You Earn” calculator on the federal student aid website. Compare total cialis online pharmacy loan amount outstanding versus income to get an idea of what’s available.

Areas of concern: This new program is meant to help provide relief to federal student loan borrowers that are carrying lots of debt with lower income. However, a person that has relatively high income can still qualify if their debts are that much higher. Consider high-debt, high income occupations like Medical Doctor as an example. During early years, this program may provide a monthly cash flow management solution, but as income increases the applicant would eventually lose eligibility and revert to standard repayment. This may cost more in total interest over the loan term.

Commentators on this program have pointed out that this does not really solve the issue of debt; rather it restructures debt to make it more affordable to repay on a monthly basis. Some have called this a form of “soft-default” on federal loans, as approved applicants cannot afford to repay the loan under standard terms. The more sensible alternative is to find ways to reduce college costs, and reduce the total need for loans in the first place.

Others have added that this loan repayment subsidy renders the already available Subsidized Stafford loan obsolete. In the subsidized Stafford loan, the government already pays all the interest that accrues on the loan while the student maintains at least half time registration status or greater. Now an additional subsidy is added to the repayment of the loan on the back-end, a duplication of subsidy efforts. Some in Congress have proposed that subsidized Stafford loans be terminated, with the savings moved to Pell grants to help pay for a college education instead.

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