Last week, President Obama gave an executive order to extend the eligibility for the income-based federal student loan repayment plan, ‘Pay As You Earn’ (PAYE). Under the PAYE plan, borrowers can have their payments capped at 10 percent of their discretionary income (income minus the poverty guidelines for their family size). Public service workers will have the balance of their loans forgiven after 10 years, for other borrowers it is forgiven after 20 years.
So why is it such a big deal? Previously, only those who first borrowed loans between 2008 and 2011 were eligible. Expanding PAYE to all federal direct student loan borrowers (with the exception of federal PLUS Loans for parents) is expected to affect up to 5 million more borrowers nationally and more than 57,000 borrowers in Iowa. Millions already take advantage of specialized repayment plans, such as the Income Based Repayment Plan which caps loans at 15% of discretionary income. Now all borrowers can take advantage of this five percent difference which is anticipated to be available by December 2015.
Borrowers on this plan must submit documentation every month in order to set the payment amount. Payment amounts may increase or decrease each year based on income and family size. Keep in mind the reduced payment amounts may mean paying more interest throughout the life of the loan and there may be taxes on any amount forgiven after 20 years.
Curious as to what your payments would be on this plan? Check out the Federal Student Loan Calculator to see an estimate. If you are interested in switching to this repayment plan, contact your lender to discuss the process and make sure this is the best repayment option for you!