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Federal Student Loans “Pay As You Earn” Set To Go Into Effect

Federal student loan borrowers are set to get a new repayment option. Here’s the scoop.

Beginning December 21, 2012 some people who borrowed federal student loans will have a new way of repaying the government.

The “Pay As You Earn” program looks promising – for those who qualify.

Under the new “Pay as You Earn” program, eligible student loan borrowers will be able to cap their monthly payments at 10 percent of their discretionary income, and have their loans forgiven after 20 years. The Pay as You Earn program also offers loan forgiveness after 10 years to those involved in public service who have made all their payments on time.

The program, originally slated to phase in beginning in 2014, was pushed ahead by the Obama administration. Approximately 1.6 million borrowers will be able to take advantage of the program.

Qualifying For “Pay As You Earn”

Not every federal student loan borrower will be able to qualify for the new program. Borrowers must have started taking out federal loans after October 1, 2007, and received at least one disbursement after October of 2011. Borrowers must also have income that qualifies them for partial financial hardship based on their income standard repayment options such as income-based repayment and income-contingent repayment.

You’ll want to have a student loan lawyer or other loan counselor determine whether your income-based and income-contingent repayment options point to repayments lower than the standard ones, but so long as your loans and payments qualify you should be able to get into this new program.

Once you’re in the program, you will be responsible for making monthly payments based on your income and family size. Those payment amounts can adjust each year.

Beware The Repayment Term

Under PAYG, your payments will be lower than would otherwise be the case but you could end up paying more over the long-term. Remember that a standard repayment plan for federal student loans runs 10 years; under PAYG you’re looking at 20 years of payments. You’ll also need to keep up with the annual documentation, but if the payments are lower overall then it’s definitely one for the “win” column.

Image credit: thisisbossi

By |December 10th, 2012|

About the Author:

I've been a consumer protection lawyer since 1995, working to help people end their bill problems. I'm a faculty member at the Student Loan Law Workshop, a nationally recognized speaker, and a long-time member of both the National Association of Consumer Bankruptcy Attorneys and National Association of Consumer Advocates.
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