For years, student loan borrowers have been able to lower the monthly payments on their federal loans by signing up for an income-based repayment plan. But that hasn’t been enough for some people—particularly young graduates with high starting salaries who feel like they can afford more than 10% of their income each month towards their student loans. These borrowers were waiting for a program that would let them pay less than 10% of their income while still being able to get rid of their debt as quickly as possible. Well, that program is finally here: Pay As You Earn (PAYE). It’s one of four new options available under President Obama’s new Student Aid Bill of Rights, which seeks to simplify student loan repayment and make sure everyone has access to the best repayment plan possible based on their specific financial situation.
Student Loan Pay As You Earn
William D. Ford Direct Loan Program
The William D. Ford Federal Direct Loan Program (Direct Loan Program) is a federal program that makes loans to undergraduate, graduate, and professional students. The purpose of the Direct Loan Program is to increase college access for needy undergraduates by providing low-cost loans with reasonable terms.
The Direct Student Loan Program is made up of several different types of loans including:
- Federal Perkins Loan Program – This program provides low interest rate loans to undergraduate and graduate students who meet certain eligibility requirements;
- Federal Stafford Loan – This loan program offers fixed interest rate loans with numerous repayment options;
- Federal PLUS Loans – This loan allows parents and graduate or professional students to borrow money for school expenses at an attractive fixed rate;
- Consolidation Loans – Consolidation allows borrowers with multiple student loans from various lenders to combine them into one single loan that can be paid off over time;
Borrowers should consider other federal programs when choosing their repayment plan if there are better options available through another agency’s programs like the Military Student Loan Repayment Program or other state-based programs.
Grad PLUS Loans
Grad PLUS Loans are federal loans for graduate students. They aren’t subsidized and they’re not based on financial need, unlike the Federal Stafford Loans. The interest rate on Grad PLUS Loans is fixed at 7.6%, which means it doesn’t depend on your credit score or other factors. There’s also no origination fee for Grad PLUS Loans, whereas there is one for all other federal student loans (e.g., the Federal Stafford).
Federal Consolidation Loans
Do you have more than one federal student loan? With a Federal Consolidation Loan, you can combine all your federal student loans into one loan. This can lower the monthly payment on all of your federal student loans and increase the maximum repayment period to up to 30 years!
You will not be able to consolidate if:
- You have defaulted on a previous consolidation loan
- You have only one or two eligible federal loans. The first $7,500 in outstanding undergraduate Stafford Loans for undergraduate students is eligible for this program. Graduate or professional school loans are not eligible for this program at this time unless they are consolidated together with their parent PLUS loan as part of the Parent Loan Consolidation program (PLUS).
Private student loans
You may have private student loans. If you do, they are not eligible for PSLF. You must be in repayment to apply for PSLF and you must be in repayment to receive PSLF benefits. If your employer does not offer an option for repayment plans, it’s up to you to find a plan that works best.
Income-sensitive repayment plan (ISRP)
- Income-sensitive repayment plan (ISRP)
This repayment plan can be used with both federal and private loans. With this plan, your payments are based on your income and family size. You can choose 10-, 20-, or 25-year terms, depending on how much you owe. ISRP allows for monthly payments as low as $5 per month for all borrowers with eligible loans; however, if you have high balances and/or if you have federal loans only, the minimum payment is $50 per month.
Income-contingent repayment plan (ICRP)
The ICRP repayment plan is based on your income, family size and federal student loans. You may be eligible if you have a partial financial hardship.
- Income-contingent repayment plan (ICRP): Repayment is based on your income and family size, with lower monthly payments when your income rises. If you’re married, the spouse’s income will determine payments as well. You can take advantage of this program if you’ve borrowed at least $30,000 in federal student loans since 2006 or received an economic hardship deferment in the past six months. To qualify for this program, your monthly payment cannot exceed 20 percent of what you earned above 150 percent of poverty level for a single person; 25 percent for married couples whose combined incomes fall below 300 percent of poverty level; 30 percent for all other cases.
Repayment plan with an extended term
An extended term repayment plan allows you to repay your loan over a longer period of time. The extended term is usually 10 years, but you may be able to extend it to 20 years depending on your circumstances.
This repayment plan is not available for all loans and can only be applied for after you have been told that you are eligible for payments under the Income-Based Repayment or Pay As You Earn plans.
Pay As You Earn Repayment Plan (PAYE)
The Pay As You Earn Repayment Plan (PAYE) is a repayment plan for federal student loans. PAYE is designed to make repayment more manageable by adjusting your monthly payments based on your income and family size, so that you can pay back your loans faster if you have the means to do so. The PAYE program caps monthly payments at 10% of discretionary income, which includes all earned income beyond 150% of the Federal Poverty Guidelines for your household size (if no one in the household has any other type of debt).
Revised Pay As You Earn Repayment Plan (REPAYE)
The Revised Pay As You Earn Repayment Plan (REPAYE) is a repayment plan that offers the lowest monthly payment of all the income-driven repayment plans.
REPAYE is available if you took out a Direct Loan on or after October 1, 2007 and before July 1, 2014; and if you are a new borrower as of October 1, 2007. If your loans were held by multiple servicers during this period and any one servicer has not yet transferred your loans to FedLoan Servicing (PHEAA), you may be eligible for REPAYE even though they have not been transferred to FedLoan Servicing (PHEAA).
To enroll in REPAYE:
Borrow smarter, invest in your future.
- Pay it off fast. The sooner you pay back your loans, the less interest you’ll end up paying over time.
- Know what it is going to cost you. Make sure that what you are paying for is worth it and that your loan covers the services that are important to you.
- Know how much money will be coming out of your paycheck each month so that if there is not enough left over at the end of the month, then go back and figure out whether or not this would be a good idea before applying for anything else!
- Know what options are available when deciding whether or not an investment makes sense in terms of helping build wealth over time as well as keeping costs down while still allowing room for growth potential within one’s budgeting constraints (i.e., high risk investments with higher returns tend to carry more risk).
The PAYE repayment plan and the REPAYE repayment plan can be used for federal student loans. These plans offer lower monthly payments than other options and are available for borrowers who have a partial financial hardship or graduated from an eligible program. If you’re struggling to pay back your student loans, now may be the time to consider these options as a way out of debt and back on track with your finances!