Pay As You Earn Improvement

erase_the_debt_pencil_400_wht_8717A Pay As You Earn (PAYE) improvement could make the plan better for borrowers with older loans.  President Barack Obama took executive action to expand PAYE, which will help millions reduce their student loan payments.  This is being accomplished as part of a plan to ease the economic effects of the massive student loan debt.  Student debt has reached over 1.1 trillion dollars.

The new action by the President proposes regulations, which would extend the Pay As You Earn loan repayment option.  It would allow more students who borrowed federal student loans to pay only 10 percent of their annual discretionary income.  The PAYE method also forgives the remaining balance after 20 years of monthly payments by the government.  Both of these benefits are only applicable to Federal Student Loans.

This action will open the PAYE plan to people who had taken out a loan before October 2007 or someone who had not received a secondary payment since October 2011.   To qualify for PAYE method, your loans need to be direct federal loans. Many of the older loans were part of the FFEL program and will not qualify unless you consolidate them into the direct federal loan program.

You need to do your research before you select your student loan repayment option.  The lowest payment is not always the best solution.  The PAYE has both positive and negative aspects that should be reviewed and understood.  Listed below are some pros and cons to consider.

The positive benefits are:

  1. It is a way to avoid default or late payments by lowering your monthly cost and it can make the payment more affordable based on your currently income level.
  2. If you plan to qualify for the Public Service Loan Forgiveness (PSLF) program then the PAYE option is a cost saving solution to consider.  Only certain repayment options qualify for thePSLF Program.

The negative issues:

  1. When using the PAYE method of repayment your loan balance will be increasing.  This finance consequence is called negative amortization.  An increasing loan balance may make it more difficult to get approval for other financing purchases such as a home or car.
  2. If you are married or are planning to be married, your ability to file married and joint will be affected if you are using the PAYE plan.  Depending on the debt level and income of the other spouse, you may need to file married and separate to maintain the lower PAYE monthly amount.
  3. This executive action is not going to be available until December 2015.

The same pros and cons apply to the other income driven repayment methods such as IBR and ICR.  Please go to our College Affordability website resource section where you can learn more about the student loan consolidation, loan repayment and loan forgiveness options that are available.

Written by