November is an anxious time for many recent graduates as grace periods end and payments come due on student loans. And last Thursday, as the month began, the Department of Education issued final rules for the new Pay As You Earn plan, giving many federal loan borrowers a new income-driven repayment option.
Income-driven repayment plans can help you avoid default by basing your payment amounts on your income. In addition to the new Pay As You Earn option, current plans for federal loans include Income-Contingent Repayment (ICR), Income-Based Repayment (IBR), and Income-Sensitive Repayment. (Options for private loans will vary depending on your lender, so be sure to ask what's available.)
The new Pay As You Earn will provide many recent and future graduates with payments that are capped at 10 percent of their income—lower than what they would pay in IBR and ICR—and will provide forgiveness if borrowers are still repaying after 20 years instead of 25.
[Find out how to start repaying student loans.]
To be eligible for Pay As You Earn, you must have taken out your first federal loan after Sept. 30, 2007, and you also must have received a loan after Sept. 30, 2011. So the plan will primarily help recent undergraduates trying to manage student debt, providing relief and helping prevent default for many.
How does it work? In addition to meeting the requirements above, you must have a "partial financial hardship" to qualify for Pay As You Earn. This basically means your income is low compared to the amount you owe. Specifically, if you owe more than 10 percent of your discretionary income, which is based on your adjusted gross income and family size, you can enroll your eligible loans in Pay As You Earn.
As long as you remain in Pay As You Earn and continue to have a partial financial hardship, you won't pay more than 10 percent of your discretionary income. As your income rises, your monthly payments will increase; if your income decreases, so will your payment amount. And, if you're still repaying your loans after 20 years, the remaining amount will be forgiven.
The Institute for College Access and Success (TICAS), which wrote the policy proposal that formed the basis of IBR and runs the Project on Student Debt, has provided some helpful examples of how Pay As You Earn will provide significant relief for borrowers with modest incomes, and why it is so important to preserve this and other income-driven repayment plans. The Student Loan Ranger will keep you updated on Pay As You Earn and when borrowers may start enrolling. You can learn more about how it works by reading our new e-book, Take Control of Your Future, on Kindle.
And if you're entering or are in repayment now, already-available options like IBR and ICR may help. As TICAS has pointed out, "[t]he current IBR plan has already helped more than one million federal student loan borrowers lower their monthly payments and avoid default … but many more borrowers could benefit from IBR and Pay-as-You-Earn in these tough economic times."
[Read more about federal student loan repayment plans.]
A variety of plans are available for federal loans, so evaluate which works best for your situation. The Department of Education has calculators you can use to estimate payments under each plan, and you can estimate how much you'll pay in the short term and overall using the calculators at FinAid.org.
If you find you cannot afford standard payments, consider income-driven plans and other options that can help you avoid default. Default carries a slew of negative consequences, including additional fees and harrowing collections processes. Campus Progress' recent report, "The Student Debt Crisis," includes a great breakdown of the different processes and their impact on student loan borrowers.
We want the millions that can be helped to know how to access these tools. There's more to learn about who's eligible for income-driven repayment plans and how to use them, so attend a free webinar, follow us on Twitter (use #studentdebthelp), and learn how to navigate IBR, ICR, and Pay As You Earn by reading Take Control of Your Future.
Radhika Singh Miller is a program manager for Educational Debt Relief and Outreach at Equal Justice Works. She has served on student loan committees in the Department of Education's negotiated rulemaking focusing on the College Cost Reduction and Access Act (CCRAA) and other debt relief initiatives. Radhika graduated from Loyola Law School Los Angeles. Prior to joining Equal Justice Works, she was a staff attorney at the Partnership for Civil Justice, focusing on constitutional and civil rights litigation and advocacy.