Recent and soon-to-be college graduates will soon have a new option to help keep their federal student loan payments manageable and avoid default—the Pay-As-You-Earn repayment plan recently finalized by the U.S. Department of Education.
Students graduating from college this year are entering the job market with record student debt and facing near record unemployment rates. Half of recent college graduates are either unemployed or underemployed—the highest share in more than a decade. This makes the new student loan changes particularly timely.
Pay-As-You-Earn is designed to help these recent and soon-to-be college graduates, allowing them to make lower income-based monthly payments on their loans than the current Income-Based Repayment (IBR) and Income-Contingent Repayment (ICR) plans allow. Pay-As-You-Earn will also provide loan forgiveness after 20 years rather than 25 years of payments, allowing borrowers to more easily save for retirement and help their children pay for college. To be eligible, borrowers must have taken out their first federal student loan after September 30, 2007 and received a loan disbursement after September 30, 2011—meaning primarily recent undergraduates.
Some have questioned how much borrowers with modest incomes will benefit from the plan. In fact, such borrowers will receive significant relief. Here are just a couple of examples:
- For students leaving school in 2012 or later with $26,600 in federal loan debt (the average total debt for borrowers in the Class of 2011) and earning $25,000 a year (adjusted gross income), Pay-As-You-Earn will lower their monthly payments by about one-third (from $103 to $69) compared to the current IBR plan.
- Pay-As-You-Earn will also provide significant repayment relief to the many working adults who went back to college during the economic downturn. A married recent graduate with two children, an adjusted gross income of $45,000, and $26,600 in federal loans will also see his or her monthly payments reduced by one-third (from $130 to $87) compared to the current IBR plan.
No one repayment plan will be the best or most affordable option for everyone, but particularly in today’s economy, many borrowers are struggling to avoid delinquency and default. With the Class of 2012’s first student loan payments coming due starting this month, for many, Pay-As-You-Earn cannot come soon enough.