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Pay As You Earn Student Loan Repayment Plan

President Barack Obama first announced this plan in Oct. 2011 and it has become synonymous with the ‘Obama Student Loan Plan.’ This repayment plan, based on your monthly discretionary income, stems from a campaign promise Obama made as he courted young voters, telling them he would provide relief on their student loan payments and help better manage their debt.

He unveiled the plan at Colorado University, telling students about his own personal struggle, paying off $120,000 in student loans when he and First Lady Michelle Obama married. The repayment plan became effective on Dec. 21, 2012.

If you are facing a partial financial hardship, this plan offers you the lowest monthly payment amount of the repayment plans based on your income, family size and state of residency. Monthly payments under the Pay As You Earn Plan are capped at 10 percent of your discretionary income.

Once you qualify, you can continue to make payments under the plan even if your hardship no longer applies. An additional benefit of Obama’s Pay As You Earn Plan is that the remaining balance on your loan can be forgiven after 10 or 20 years, depending on certain qualifications. The forgiven amount may be taxed.

The Pay As You Earn Plan is one of the flexible repayment options available when you consolidate your student loans. If your payments increase significantly, you can switch only to the Standard Plan to complete the principal payoff of your consolidated loan.

The Department of Education estimates that 1.6 million Direct Loan borrowers will be able to lower their payments, putting a dent in student debt, by using the new plan.

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Plan Eligibility

All Stafford, Direct PLUS Loans made to students and consolidation loans that do not include loans made to parents are eligible for Pay As You Earn. Uninsured private loans, Parent PLUS Loans, loans that are in default, consolidation loans that repaid Parent PLUS Loans and Perkins Loans are not eligible.

Federal Family Education Loans (FFEL) cannot be repaid under Pay As You Earn, but they are considered when determining if you have a partial financial hardship.

You would qualify as having a partial financial hardship if your monthly payment on your eligible federal student loans under a 10-year Standard Repayment Plan is larger than the monthly amount you would be required to pay using Pay As You Earn.

While this plan is similar to the Income-Based Repayment Plan, which caps monthly loan payments at 15 percent of discretionary income, Pay As You Earn caps payments at 10 percent. Discretionary income is determined by taking your adjusted gross income and deducting the poverty guidelines based on family size.

The following chart shows the maximum Pay As You Earn monthly payment amounts for a range of incomes and family sizes using the poverty guidelines that were in effect as of January 2012, for the 48 contiguous states and the District of Columbia. Your payments may be adjusted annually based on changes to your income and family size, but it will never exceed the required payment on under the 10-year Standard Repayment Plan.

Family Size
Annual Income 1 2 3 4 5 6 7
$10,000 $0 $0 $0 $0 $0 $0 $0
$15,000 $0 $0 $0 $0 $0 $0 $0
$20,000 $27 $0 $0 $0 $0 $0 $0
$25,000 $69 $19 $0 $0 $0 $0 $0
$30,000 $110 $61 $11 $0 $0 $0 $0
$35,000 $152 $103 $53 $0 $0 $0 $0
$40,000 $194 $144 $95 $45 $0 $0 $0
$45,000 $235 $186 $136 $87 $37 $0 $0
$50,000 $277 $228 $178 $129 $79 $30 $0
$55,000 $319 $269 $220 $170 $121 $71 $33
$60,000 $360 $311 $261 $212 $162 $113 $95
$65,000 $402 $353 $303 $254 $204 $155 $105

Benefits of Obama’s Pay As You Earn Plan

If a monthly payment in this plan doesn’t cover the loan’s interest while you are still under a financial hardship, the federal government will pay the unpaid accrued interest on a subsidized Stafford Loan for up to three years from the time Pay As You Earn is implemented.

Unpaid Interest will capitalize if you are no longer facing a partial financial hardship. If that happens, the total interest that does capitalize is limited to 10 percent of your original principal balance.

You may be eligible for a 10-year public service forgiveness of the remaining loan balance if you are employed full-time for a public service organization and make 120 on-time, full monthly payments.

If you do not qualify for public service forgiveness, but meet certain other requirements, your remaining balance is forgiven after 20 years of repayment.

Since the Pay As You Earn Plan is based on income, you must submit income documentation each year to your loan service provider. If your income increases from year to year, the monthly payment may be adjusted. However, it will not be more than you would have owed with the 10-year Standard Repayment Plan.

If payments significantly increase, you can only switch to a Standard Plan to finish paying off the rest of your consolidated student loan balance.

Student Examples
Students Income Owed Monthly Payment
John $30,000 $25,000 $114
Mark $25,000 $26,000 $69
Beth $19,000 $50,000 $18.71

You will notice that higher borrowers will benefit most from this new plan by being able to make lower payments. For example, if John owes $25,000 in loans and is making $30,000 a year could see payments lowered to only $114 a month, according to a White House Fact Sheet. Now if a student owes just a little more and makes just a little less, the monthly payment will significantly decrease.

Now let’s say that Mark owes $26,600, which was the average amount borrowed in 2011, and received an adjusted gross income of $25,000 a year. He would pay $69 a month. Not only does Mark pay less than John, but if you compared this to the Income-Based Repayment Plan, he would pay $103.

Beth receives the greatest monthly benefit from the plan, as her payments now match the capabilities of her discretionary income (the leftover money after subtracting living expenses by using the federal poverty guideline. Additionally, if she had been using the 10-year Standard Repayment Plan, she would owe $500 a month.

Determining Which Repayment Plan is Right for You

Deciding which repayment plan is best for you can be difficult.

We can help you review your options before committing to a new repayment plan. It is important to take action and address loans immediately — before your credit report is damaged by defaulted loans and interest builds on money you have not started to pay back.

Cecillia Barr

Author

Cecillia Barr

Cecillia Barr is a graduate of the University of Central Florida. She blogs about her extensive knowledge on student loans in order to help others reduce their debt and live financially independent lives.

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