Once you graduate college you have about 6 months to figure out how you are going to pay back those student loans-assuming you have them. When you begin to figure out what your plan is, you will quickly find out there are a few different student loan repayment options to choose from and you really need to take a look at your particular situation before you choose one.
One of these student loan repayment options that could be very beneficial to some students is the Pay As You Earn plan. This is another plan offered to help individuals and families that are experiencing financial hardships.
I am still surprised to find out that not everyone with student loans has heard of this plan, it seems to provide great relief to individuals who need it.
Federal Direct Loans apply to this program while not all other loans do. Some of the other loans, such as FFEL loans can be used to determine whether or not a financial hardship is present though.
According to studentaid.ed.gov, these are the loans that are eligible
- 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
The Pay As You Earn student loan repayment option takes into consideration income and family size following when calculating your monthly payment. Considering income and family size, your payment will be equal to 10% of your discretionary income (your income minus the poverty guidelines for your family). What this means is that if you are not making very much money, chances are this plan will reduce your monthly payments.
There are a however, few caveats to this plan.
There are some time constraints to be aware of. You must not have taken a loan out before October 1, 2007, and must have received a Direct Loan on or after October 1, 2011.
These 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
If you are qualified to enroll in the Pay As You Earn plan, you need to take a look at the pros and cons.
- Like mentioned earlier, it will only be 10% of your income and there is a good chance it will be less that the other income based repayment plans.
- If your monthly payment doesn’t cover the interest accrual, the government will pay it on Direct Subsidized Loans and the Subsidized portion of your Direct Consolidation Loans for up to 3 consecutive years from your start date.
- Interest does not capitalize on amounts not covered by your loan payment during hardship. The total amount of interest that capitalizes during repayment is limited to 10% of your principal balance.
- Forgiveness after 20-year qualifying repayments
- ·Eligible for 10-year public service loan forgiveness
But it’s not ALL roses…there are a few cons that must be considered.
- There is a possibility of paying more interest over time since monthly payments are reduced.
- You must submit annual information to your loan servicer so they can verify your income.
- If you have loans through the FFEL Program, you will need to set up another payment plan for them.
- Though FFEL Program loans are taken into account when determining whether you have a partial financial hardship, only Direct Loans are eligible for the Pay As You Earn repayment plan. Therefore, you will need to select another repayment plan, such as the Income-Based Repayment plan, for any FFEL Program loans that you have.
- Taxes may have to be paid on any loan amounts that are forgiven.
To get a better grasp of what this student loan repayment option has to offer, let’s take a look at this hypothetical scenario.
Let’s assume you graduated college with $25,000 in student loans (we will not take interest into account for this example). You are single with no children, live in the lower 48, and landed a job paying you $30,000 a year. We are also assuming the interest rate on all of your loans is 6.8%.
Using the repayment calculators provided by studentaid.ed.gov, under the standard repayment plan you would owe $287.10 a month over 120 months, totaling $34,524.10 in payments.
Now let’s say you considering the Pay As You Earn option, assuming you meet the earlier described qualifications. Under this plan, you would have to make payments of $106 over the next 20 years totaling in $25,440 in payments.
As you can see, under this student loan repayment option you will save a little over $9,000 over the lifetime of the loan, making this repayment option very appealing. If you do end up increasing your income over the next few years you can always increase your student loan payments and if you end up making too much you will not be able to partake in the plan anyway.
What this plan can do is give you a little breathing room right out of the gate.
It’s important to do your own research on the various student loan repayment options that are available and see if your particular situation would benefit from a plan such as this. It is at least worth a look.
I know for me, it will work great. I work for a government institution, so if I stay here for at least 10 years the remainder of my loan will be paid. Also, if I never increase my income (please don’t let this happen), I will be forgiven a hefty chunk of my loans after 20 years. I believe this repayment program has a lot of upside for student borrowers. If your income does rise significantly, then you should be in a much better position to make the higher payments in the future.
You can go here to try out the repayment calculator for yourself.
Have you heard about the Pay As You Earn plan? Are you using this plan or are you using another plan? Have you searched out all of the various student loan repayment options that are available?