President Obama’s “Pay as You Earn Plan” is a new income contingent repayment plan that seeks to help students overwhelmed with student loan debt and the monthly payments they cannot afford. This plan can help provide students with immediate relief.
Under this new plan, those who owe on student loans will only have to make payments that equal 10% of their discretionary income, which is defined as their adjusted gross income minus the poverty guidelines for their family size. (The current income contingent plan requires that borrowers pay 15% of their discretionary income.)
In addition, after 20 years of payments, if there is any remaining balance, it will be forgiven. (Under the current income contingent plan loans are forgiven after 25 years.)
Benefits of the Plan
For struggling graduates, this plan offers some much needed relief. For instance, the White House press release gives the example of a nurse who makes $45,000 a year and has $60,000 in student loans. Under the standard 10 year repayment plan, her monthly payment is $690 a month. The Pay as You Earn Plan will drop her payment to $239 a month, or $451 less than the standard repayment plan.
Keep in mind a person’s payment on this plan will fluctuate as their income decreases or increases from year to year, but the idea is that as a person earns more, she will be able to make higher payments.
In addition, if someone is completely buried in student loan debt (over $100k or more), the loans will be forgiven after 20 years. While 20 years is a long time to pay, at least there is an end in sight if their income never takes off as they would have liked.
Drawbacks of the Plan
While the plan offers relief, there are also important drawbacks. Take the nurse who drops her payment from $690 to $239 a month. Under the standard repayment plan, she will pay $22,857 in interest in the 10 years she takes to repay the loan. Under an extended 20 year repayment plan, she will pay $49,921 in interest over 20 years. Since the extended plan requires a higher payment than the new Pay as You Earn Plan, one can assume that she will be paying even more interest over the life of the loan.
In addition, our nurse, who, let’s say is 23, will still be paying on her loans when she is 43 and presumably has children of her own and mounting expenses that a family brings.
While Pay as You Earn offers students immediate, and much needed, relief, it is not a cure all. The best option is still to try to reduce your college expenses so you don’t have to take out large loans that take decades to pay back. Community colleges and public in state universities are good choices to keep your college costs low. In addition, buckling down your first years working so that you can pay on the standard repayment plan still remains the best course of action.
What are your thoughts? Is the Pay as You Earn plan a good option for recent graduates?
Latest posts by Melissa Batai (see all)
- Fun Family Staycation Activities That Won’t Break Your Budget - June 2, 2015
- Three Ways to Still Have Fun While Paying Down Debt - May 15, 2015
- Fall Is the Perfect Time for a Low or No Spend Month - February 7, 2015