The U.S. Department of Education is pushing ahead with plans to broaden eligibility this fall for a popular student loan safety net.
The program is called Pay As You Earn, and it’s one of three main income-driven repayment plans for federal student loans offered by the department.
President Barack Obama signaled his interest last year in expanding Pay As You Earn, which sets borrowers’ monthly payments as a small share of their income, and on July 7 the Education Department announced more details.
The repayment plan extends two main lifelines to borrowers. It caps monthly payments at 10 percent of a borrower’s discretionary income, based on a defined formula. And it forgives the balance due after 20 years of consistent payments.
Capping the monthly payment and taking advantage of the forgiveness provision can mean a hefty saving for borrowers over time compared with other federal repayment programs.
Currently, only borrowers who took out federal loans after 2007 are eligible to participate in Pay As You Earn. But the new proposal would open the plan to any student loan debtors regardless of when they originally borrowed.
This change would make an additional 6 million borrowers eligible, the Education Department said.
Keep in mind there are other eligibility criteria that must be met for Pay As You Earn. Borrowers should check with the loan service company or another expert.
The proposed changes come as outstanding student debt now exceeds $1.36 trillion and large numbers of borrowers are in default, according to recent data from the Federal Reserve Bank of New York. Concerns about the debt that college graduates are carrying prompted the White House earlier this year to propose a Student Bill of Rights program to provide more protection for borrowers through initiatives such as Pay As You Earn.
Before signing up for Pay As You Earn, check out an online loan repayment calculator and make sure the program is right for you.
One criticism of the program is that payments are often too low to cover the monthly interest, allowing the overall debt to continue to swell over time. That makes it even harder for borrowers to pay off the full balance.
In addition, there may some disadvantages under the plan for married borrowers filing their federal taxes. Check out the differences for “married filing separately” and “married filing jointly.”
The expansion of the Pay As You Earn program doesn’t need congressional approval, according to the Department of Education. It will be accepting public comment and hopes to enact the rule changes by the end of October.