What will change is the number of borrowers who can take advantage of this option.
- New Borrowers
- Starting in 2015, borrowers who took out loans before October 2007 or stopped borrowing by October 2011 will now be eligible.
2. How much could I save? Now, most federal loan borrowers are eligible for income-based repayment – a different repayment plan that has the same premise as Pay As You Earn.
Unlike Pay As You Earn, IBR caps payments at 15 percent of one’s disposable income and forgives the balance after 25 years of payments. Those differences could mean a lot, both in monthly payment amount and in the total amount paid over time.
For instance, consider a borrower who owes $55,000 at a 3.41 percent interest rate, has an income of about $35,000 per year, and is not married and has no other dependents. Here’s what that person’s payments would look like under three different payment plans:
|Plan||Monthly payment amount||Total paid over time||Amount forgiven|
|Income-based repayment (25 years)||$219 in the first year* ||$75,956 (paid in full after 17 years)||$0|
|Pay As You Earn||$146 in the first year*||$67,232||$18,644|
- If you work in public service, forgiveness would happen after 10 years, with a total of only about $20,000 paid during this time period.
If not, you may be better off paying your current payment amount, especially if you anticipate salary increases over the next few years, to avoid paying all that extra interest. Keep in mind that any forgiven amount will be taxed as income. Also, remember that if you work in public service, the forgiveness occurs after 10 years of payments. In that instance, it’s not taxed.
3. What else should I know? There is still a long way to go before the president’s executive action takes effect. December 2015 is the target implementation date.
The president’s overall plan includes quite a few other ideas that will make a difference to student loan borrowers:
- Improving financial incentives for federal student loan servicers to help borrowers stay out of default
- Make it easier for active-duty military to receive benefits under the Service members Civil Relief Act
- Increasing communication partnerships with entities such as the IRS and tax companies to ensure consumers are aware of their higher education rights and benefits.
For more information in regards to this program, please visit http://www.debt.org/students/obama-pay-as-you-earn/
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