One month after graduating from Avila University this June with a master’s degree in business administration, Andy Fogel received his first statement detailing payments due on his $38,000 student loan.
The bill: $380 a month for 10 years.
Fogel can’t afford that unless he limits his meals to a college diet of ramen noodles every night. No thanks.
“There would be nothing left for unexpected situations,” said Fogel, who works in the financial aid office at Kansas State University. “With everything else, I just couldn’t afford to make those payments.”
Fogel, 30, recently found a program to help him reduce those payments. And if he had waited, he probably would have been one of the 1.6 million former students expected to qualify for an even friendlier federal student loan debt repayment program that launched Friday.
The Department of Education’s Pay As You Earn plan reduces monthly payments for qualifying students with federal direct loans as well as direct PLUS loans made to graduate or professional students.
The plan caps monthly loan repayment at 10 percent of the graduate’s discretionary dollars, and it stretches out the loan repayment to 20 years instead of 10.
A plan launched in 2009, Income Based Repayment, capped loan repayment at 15 percent. That’s what Fogel signed up to use.
The new plan and the 2009 plan were developed to “mitigate” a higher education system that has become heavily reliant on student borrowing, said Lauren Asher, president of the Institute for College Access and Success.
“This is very good news,” Asher said. “This means that if you are a recent graduate having trouble finding a job and have student loans, your payments will be even more manageable.”
Two-thirds of college seniors who graduated in 2011 had student loan debt. The average was $26,600 per student. That same year, unemployment for young college graduates remained high, 8.8 percent.
According to the Institute for College Access and Success, a student who graduated in 2012 or later with $26,600 in federal loans and earning $25,000 a year in adjusted gross income would pay a third less each month under Pay As You Earn than under the 2009 income-based payment plan.
The formula determines a student’s discretionary income by calculating the student’s adjusted gross income minus 150 percent of the poverty level for a family of five. What is left is discretionary.
Of course, with a reduced monthly payment, borrowers generally end up repaying their loan for a longer period of time and paying more total interest.
Even though what the borrower pays each month may increase or decrease each year based on changes in income and family size, once a student qualifies for Pay As You Earn, because of his debt and low income, he can continue to make payments under the program even if he no longer is in financial hardship. And if a borrower maintains a steady payment pattern, a loan forgiveness clause is built into the plan.
Not knowing the new plan would be launched this year, Fogel signed up for the 2009 plan this month. Though he knows he might have received a better deal with the new plan, he is thankful for the break he is getting on his monthly payments.
Instead of $380 a month, Fogel is paying $160, saving him $220 a month that can take care of other living expenses.
Fogel said he knows a lot of new and upcoming college graduates who will be happy to hear about the new plan.
“What I’m hearing from them is that it is a big shock getting out in the real world and having all the expenses that go with that and then having a big student loan in the mix,” he said. “It is almost too much to handle.”
Fogel said he wasn’t expecting to stay on his income-based repayment plan more than a year, because paying on a student loan until he is 50 or older is “too long.” As soon as he makes enough money, he plans to pick up the hefty monthly payments and get his loan paid off as soon as possible.
“For now, income-based loan repayment is going to help me have a little bit more money to put toward the expense of living,” he said.