As you probably know, many college graduates are struggling to keep up with their student loan payments. You have probably seen all the news stories about the ever increasing student loan debt. Throw in a sluggish economy and you can understand why many new recent graduates are looking for help. Thankfully, help is available right now.
Federal Help Available!
This new student loan payment solution is oddly timed to take effect on December 21, 2012 (supposedly the end of the world according to the Mayan calendar believers). All jokes, this new program is a radical change to student loan payments.
The New Payment Plan
This new plan direct from the Department of Education has been dubbed the “Pay as You Earn” plan. One feature of this new plan is the cap on your monthly payments. If you meet the qualifications, this cap (or the maximum amount you have to pay) is limited to 10% of your discretionary income. You may already be aware that discretionary income is that income you have left after paying all of your normal living expenses. Look at this easy to understand example. Say your take home pay is $2,000 a month. Your living expenses of rent, utilities, that sort of thing total out to about $1,700. The remainder is considered your discretionary income. So, to continue this illustration further, your monthly student loan payment would be based on the remaining $300.
Another cool feature of this Pay as You Earn plan is the complete forgiveness of the loan after 20 years. Incredible but true, if you have been making your payments and still have a balance in 20 years, any remaining balance is totally forgiven. But wait, it gets better. If you happen to choose a career in Public Service, your student loan debt is entirely forgiven in as few as 10 years.
Do You Qualify? Here Are the Three Questions to Ask
- How old is your student loan? The new student loan payment plan only applies to loans taken out after October 1, 2007.
- Have you had recent disbursements from your student loan? To qualify for this plan, you must have had at least 1 disbursement. (Note, disbursement is government speak that means an actual payment, in the form of cash or a check)
- You must prove some sort of financial hardship. Per the Department of Education, you a financial hardship is defined by the amount of the payments under the old payment plan compared to your possibly lower payment under the new plan
Once You Qualify, then What?
Once you have met all three qualifications, your new Pay as You Earn loan repayments begin. Your monthly payment amount will be determined by both your family size and income. You should also be aware that you have to submit the appropriate documentation as required every year. Keep in mind that your payment amount may change over the life of your loan as your family size or income changes.
One benefit of the Pay as you Earn plan that many do not talk about is that it is a onetime qualification process. Once you have initially qualified for this plan, per the Department of Education guidelines, you can keep making your payments under this plan, even if your financial hardship qualification no longer applies.
What Do People Say about this Plan?
President Obama supports this plan, saying it keeps student loan borrowers from being overwhelmed by their student loan debt. Alternatively, some naysayers criticize this plan, suggesting that it will only encourage students to borrow even more. As of now, it’s simply too early to know. The truth is that we will have to wait a few more years to evaluate the success of this new payment option.
A new law taking effect December 21, 2012 should offer some relief to college graduates concerned about student loan payments. This Pay As You Earn plan limits your monthly payments based on income and family size.
So what about you? Did you know about this new payment arrangement ? Will you qualify under this plan?
Dominique Brown
Dominique Brown is the CEO of DNB Financial Planning, landlord, financial educator and non-profit owner. He enjoys working out, helping others and everything finance. His sole purpose for creating this website is to share his passion of personal finance and to help you simplify your finances. I love questions.. So feel free to ask me anything!
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I think the definition of discretionary income should be elaborated on a bit more closely. That income isn’t personal but rather based on poverty guidelines…which is confusing. But my understanding is that you take your income and subtract that from the poverty level income in your area…then you pay 10% of that, but iono…
It is really nice to know that there is a thing called Student Loan it actually helps to those students who really needs money for their school.
I think this is a fantastic step in the right direction, just not sure there will be all that many people who qualify for it!
I agree with you on that one.. I’m curious what they mean by “financial hardship” I could make 200k and be struggling or I can make 10k and be struggling.
The “financial hardship” language was when I went from “cool” to “doesn’t apply to many people I know.” I’m sure it’ll help those most in need. Great rundown of the plan. Thanks.
I’m sure about 5% of the population falls under the financial hardship guidelines..
I think anything that will help people is a good thing, but it may be hard for a lot of people to qualify for it.
My thoughts exactly! I think the “financial hardship” thing will be though for a lot of people. Especially for people who have big salaries, but live in high cost to living areas.
Wow this sounds like a great plan. I wish it were available when I had first graduated before I got my job. Now I’m not sure if I would qualify but I’ll definitely take a look. Thanks!
You know you probably make way too much money! No way you get past the “Financial Hardship” requirement