Saturday, November 10, 2012 12:01 PM jstone

Pay Attention to the "Pay As You Earn" Loan Repayment Option

Hot off the press from the Department of Education is a new addition to your loan repayment plan options.  And pleasantly this plan has a much more descriptive and understandable name that the other plans (i.e. Standard, Extended, Graduate Extended etc.) – it is quite simply “Pay As You Earn”.

“Pay As You Earn” is a new income based payment plan akin to the existing Income Based Repayment (IBR) or Income Contingent Repayment (ICR) plans.  “Pay As You Earn” is generally considered the most “generous” of the repayment programs and was announced by President Obama last October acting as one of the cornerstones of his student loan relief efforts. Final regulations on the program were issued by the U.S. Department of Education last week and the specifics of the plan are already up on the DOE student loan website.

“Pay As You Earn” is really an accelerated version of the existing Income Based Repayment program. Whereas IBR was based on making loan payments equivalent to 15% of your discretionary income (as calculated by the DOE) Pay as You Earn drops that payment to 10% of your discretionary income.  Also whereas IBR forgave any existing loan balances after 25 years of consistent payments, Pay As You Earn will forgive significantly earlier at the 20 year mark.

The key to Pay As You Earn is not just determining if you can meet the “partial financial hardship” qualification (based on loan debt to income) but also have specific eligibility based on your loan portfolio.  To qualify you must have taken out your first federal loan after September 30, 2007 and you must have also received a loan after September 30, 2011.  As such, if you are a current YLS student with just law debt you more than likely meet that standard. 

But just like Income Based Repayment there a couple of things to be wary of with Pay As You Earn.  First if you r payments based on income are calculated so low,  you may not be keeping up with the interest building on your loan and may have negative amortization.  Second, the forgiven amount at the 20 year mark can be a taxable occurrence in the calendar year when the forgiveness occurs (increasing your tax liability significantly).  Finally, if you have any FFEL loans (federal student loans provided through private lenders) those cannot be repaid using Pay As You Earn (although they will be counted in your total loan debt to determine the financial eligibility hardship).  If you are not sure if you have FFEL loans- check your loan history at the National Student Loan Database.

And Pay As You Earn is already stirring up some controversy among critics who feel  it is primarily benefitting those graduate and professional students with high loan debt (with some specific references to  Law students) more so than undergraduates.

Very high hopes have been placed on Pay As You Earn to revolutionize student loans repayment and significantly impact the student debt crisis.  Referencing the Pay As You Earn initiative, former President Clinton himself stated that “this will change the future for young America".

Right now the DOE readily admits that its biggest challenge is simply getting the word out there that this new repayment option exists for both current and new borrowers amongst  the myriad of other loan repayment programs they offer.

For more information - view the DOE Pay As You Earn information sheet or use the Pay As You Earn calculator to estimate eligibility and loan repayment.  If you have questions on your eligibility, use of the calculator or how this program may work for your personal law debt, stop by the Financial Aid Office for one on one loan counseling.

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