Pay as You Earn Plan May Provide Student Loan Relief

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?

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Melissa works from home as a freelance writer, virtual assistant and blogger. Her blog, Mom's Plans, reflects her desire to plan life one step at a time while caring for and homeschooling her children (ages 9, 5 and 3) as well as paying down debt and saving for a house.
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Comments

  1. As someone who took out a lot of student loans and then had to sacrifice to pay them back, I completely agree with you. The best option for paying back student debt is not to take on the student debt (loans) at all. The fear of having kids in college while I was still paying off my own loans was what motivated me to pay mind off as fast as possible.

    • If you can afford to go to school without loans, that is the best situation. If not you have to seriously consider the consequences of any loans you take out and perhaps scale things back a bit. For example, maybe go to a school close to home so you can commute instead of going away and paying room and board.

  2. “Pay as You Earn Plan” is good but loan only should be taken when there is no other option besides it. Second, People have to permission to pay back as much as possible when they have much money(it may be additionally money or part time money). Thus they have to pay less when earn less but may pay more when have much money, thus they can reduce interest.

  3. My wife and I both have student loans. I shouldn’t because I had a full ride athletic scholarship (plus a stipend) for my undergrad years, but alas, I was young and stupid. I wasn’t aloud to have a job per my athletic contract and I was going to school in Hawaii . . . I thought it was pretty neat that twice a year I could have $5,000+ just deposited into my student account. Anyhow, still chipping away at those. With the way things are going it was a waste. I work two jobs (unrelated to my field) and so does my wife. As it is now, we would qualify for the income contingent plan and it would be very helpful for a short term solution. The pay as you earn plan sounds almost like a “get out jail free card” but the reality is that it is very similar to a credit card only with lower rates and a much, much higher spending limit. Student loans are handy in a pinch, but not the way to finance an education.

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