What You Need to Know about “Pay as You Earn” Student Loans

“Pay as You Earn” takes the risk out of college loans. It is the brainchild of President Obama, allowing low and average-income students to pay for their education without risk of owing more than they can afford to repay. It also relieves recent graduates from an impossible situation, finding themselves with loans to repay before they can even secure an income. The program allows students to repay their loans at a rate they can afford. If they cannot find a job, they pay nothing until they do. The federal government pays the interest up front for up to three years.

The Need for “Pay as You Earn”

According to Charlyn Stanberry in her article, “Problems Recent Graduates are Facing,” appearing on Politic365.com, 53 percent of recent college graduates are either unemployed or underemployed. It’s hard to pay back $25K to $100K in student loans while flipping burgers or running a cash register for a living. It’s enough to make even bright high school graduates give up on college.

Kids are the Hardest Hit in the Recession

While many demographic groups are experiencing economic recovery, young people are still suffering extreme hardships. According to a recent study by Georgetown University, titled “College Majors, Unemployment and Earnings – Not All College Degrees Are Created Equal,” recent college graduates experience an 8.9 percent unemployment rate.

The authors of the study, Anthony P. Carnevale, Ban Cheah and Jeff Strohl, are quick to point out that college graduates are faring better than their high school graduate contemporaries and far better than high school drop outs. Young high school grads have an unemployment rate of 22.9 while dropouts are a staggering 31.5 percent jobless. Thus, while college does give young people a better chance to find a job, there is no guarantee that they will find employment upon graduation. Finding a high paying job in their field of study is far from certain. Without “Pay as You Earn,” taking a student loan under the current circumstances seems far from prudent. Paying the loan back could prove impossible.

Would You Benefit from Pay as You Earn?

“Pay as You Earn” is a new government program to give relief to recent college graduates who owe more in student loans than they can repay. Here’s how it works:

    • You pay only 10 percent of your discretionary income each month, regardless of your balance. Discretionary income is your annual income minus poverty level.
    • If your payment doesn’t even cover the interest, the government pays the rest of the interest for up to three years from the date you apply for “Pay as You Earn.”
    • Your loan balance will be forgiven in 20 years, even if you still owe a substantial amount.
    • If you make 120 monthly payments, over 10 years while working full time in a public service job, your loan will be forgiven at the end of those 10 years. Public service includes:
      • Military Service
      • Government Employees
      • Law Enforcement
      • Fire Department
      • Public Education
      • Health Care
      • Social Work
      • Prosecuting Attorney
      • Public Defender
      • Library Employees

Example of How it Works:

This illustration shows just how the loan program can save a college graduate from drowning in debt:

A graduate owes $50K at 3.4 percent interest. She makes 22K working in a public library. This qualifies as a public service job. She lives with one dependent child. The poverty level for two people is $15,130. Subtract $15,130 from $22,000. That leaves $6,870 in discretionary income, or $572.50 per month. The graduate would pay only $57.25 per month, no matter how much she still owes.

The government would pay the rest of the interest for three years. If the situation persists for over three years, the interest starts adding up on the loan. The loan will be paid off, regardless of the balance after 120 monthly payments. Without this program, our hypothetical student would pay $492 per month, even if she became unemployed.

Consider another example outside of public interest employment:

Another graduate was unemployed for a full year and owed $30K in student loans. He paid nothing, and lived with his mother until he found a job. Today he makes $100K. He was able to resume his student loan payments of $295 per month. This allowed him to pay his loan without damaging his credit, paying a penalty for missed payments or paying back interest for the year he was unable to pay.

Are You Eligible?

The following criteria will determine if the Pay as You Earn program can benefit your situation:

1.Must be a New Borrower

Were you a new borrower as of October 1, 2007? Only those who had no outstanding balance on a Direct Loan or FEEL program loan prior to October of 2007 are eligible. You also must have received a disbursement since October 1, 2011.

2.The Right Loans

Only loans made through one of the Direct programs are eligible for the “Pay as You Earn.” Both Direct Subsidized Loans and Direct Unsubsidized Loans are eligible for the program. Also included are Direct PLUS Loans. Direct PLUS loans are designed for graduate students and professional students. Direct Consolidation Loans are also eligible provided they don’t include loans made to parents or other ineligible loans.

3.Some Loans are Not Eligible

Private loans such as those taken through a lending institution are not eligible for the program. In addition, any loans taken out by parents, even if they are taken out through a government program are not eligible for “Pay as You Earn.” None of the FEEL Program loans is eligible and neither are consolidation loans that combine loans made to parents with other loans that would have qualified otherwise.

4.Partial Financial Hardship

Financial hardship is based on income and family size. The same thing your payments are based on. In general, if your current educational loan is more than 10 percent of your discretionary income then you qualify. Even loans that do not qualify for “Pay as You Earn” are added to your total student loan payments. That means that if you have some eligible loans and some ineligible loans, you can get a break on your eligible loans based on the total payment of all your loans.

There is no question that the young people have been hardest hit by unemployment and underemployment. The government is offering them an opportunity to get a no risk education. With Pell grants and student loans, nearly anyone capable of the academics can attend and graduate college. This is a good investment in our young people and is sure to pay off over time.

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