Last week the Department of Education released the final regulations for Pay-As-You-Earn, which means Obama’s revamp of the government’s Income-Based Repayment plan is heading into the final stages. Pay-As-You-Earn has been in the works for a while now and has been fast tracked by the President. The Department of Education’s statement reports the changes are scheduled to go into effect on July 1, 2013. Pay-As-You-Earn has been projected to assist millions of borrowers and provide some much needed relief to those who are over-burdened with student loans.
Loan repayment under several government plans, such as Income-Based Repayment and Income-Contingent Repayment, is based on the borrower’s discretionary income. The major effect of Pay-As-You-Earn will be to lower the cap on the percentage of borrower’s discretionary income from 15% to 10%. This is projected to significantly lower the monthly student loan payments for millions of borrowers. Pay-As-You-Earn will also make loan forgiveness available at the end of 20 years of on time payments in lieu of the current 25 years.
Interestingly, the changes will provide the biggest benefit to students who choose to attend graduate programs. This is partly because the plan’s cost-of-living exemption favors borrowers making over $25,000 per year. For instance, a lower income borrower might already only be paying $20 per month for loan repayment, while a middle income borrower is paying $800 per month. With PAYE projected to lower repayments by 33% per month, the more money you make, the higher that 33% in actual dollars. There are similar benefits to be gained by borrowing the maximum $31,000 in federal loans, something a graduate student is likelier to do.
Despite the 2013 start date for these changes to take effect, PAYE makes it possible to take advantage of the new cap and shorter loan forgiveness timeframe on loans dating back to 2008. In order to do so, a student must also take out student loans after the changes go into effect. This is another incentive for recent graduates to consider grad school.
Announcing the final phases of Pay-As-You-Earn, President Obama commented: “In a global economy, putting a college education within reach for every American has never been more important. But it’s also never been more expensive. That’s why today we’re taking steps to help nearly 1.6 million Americans lower their monthly student loan payments. Steps like these won’t take the place of the bold action we need from Congress to boost our economy and create jobs, but they will make a difference.”
PAYE is a much needed step toward positive change and is eagerly anticipated. It will, however, be accompanied by the usual complicated process of figuring out how to take advantage of it. Fortunately, there are organizations that exist to help students navigate such complexity by helping them get the most value from well-managed student debt.