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Good news for Student Loan Borrowers!

October 23, 2014 by Brett Heman

Good news for Student Loan Borrowers! Some big reform is coming in regards to student loans. It is called the “Pay As You Earn” program and is aiming to help student loan borrowers with massive amounts of student loan debt.
Let’s answer some big questions about this new program:
1. Will these updates help me? If you have federal student loans, maybe. The president expanded the existing “Pay As You Earn” program available to federal student loan borrowers.Currently, this plan caps monthly payments at 10 percent of a borrower’s disposable income and forgives the balance after 20 years of payments. Those aspects of this plan won’t change.

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
Standard 10-year $541 $64,656 $0
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/

Credit for information in post goes to: www.usnews.com

Filed Under: Financial Aid, Student Loans

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