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Understanding the New “Pay as You Earn” Student Loan Reform

Lifestyle & Opinion

by Sara Mayo

 

College students in the U.S. who are banking on paying back their loans with the Pay as You Earn initiative launched by President Obama in 2009 should take a second look at the fine print before assuming that just anyone is eligible.

If you are like me in thinking, “I’m not worried about how I am going to repay my loans, I will just do that new loan thingy that Obama’s been talking about”, think again. Yes, it is true that 1.6 million Americans with previous debt will qualify. A total of 6 million students will benefit from this program. The problem lies in thinking it’s just going to happen automatically. With all the hype that’s swirling around this topic, it’s easy to get confused or even turned off. The government has tried to make understanding loan repayment options simple with the Student Aid sites. What they haven’t done is fully explained the backdoor regulations to the program once you’re in. For some of us who thought the Pay as You Earn program was open to anyone with a job, the following information might come as a shock.  As it is with all loan repayment options, you have to fit certain qualifying criteria, and if you haven’t been paying attention or just assumed that you will qualify, like me, then you will want to read further.

In 2009, President Obama began a mission to ensure that America would once again be the global leader with the most college graduates. Starting with the Student Aid and Fiscal Responsibility Act of 2010, his vision was realized two years ahead of time, giving more struggling borrowers the option to qualify. In order to accomplish this, the 2010 Act weaned out the banks, saving the government around 60 billion dollars, which is now being given back to students in the form of higher Pell Grant awards.

The Pay as You Earn Student loan program was designed for the sole purpose of helping those who have a substantial amount of student loans without the income to off set it. Under this plan, borrowers will be able to take advantage of what could be considered the lowest of all monthly repayment options. Payments will be capped at 10% of your income, as well as affording the luxury of loan forgiveness after twenty years; ten for those in the public service field. The idea behind it is to help students avoid default by basing their monthly payment amounts around income and family size.

This new reform also gives borrowers the option to consolidate all Direct Subsidized Loans, Direct Unsubsidized, Direct PLUS Loans and Direct Consolidation Loans. To be able to do this, though, you must be considered a “new borrower.” This is where the stipulations begin.

According to the Fed Loan Servicing Department, “Any new first time loans after 2007 will be considered, even students entering college in 2013”. To be considered a new borrower, though, your first loan disbursement must have been after September 2007. All loans prior to this do not qualify. If you started school in 2006, and received a loan, then you would be ineligible for this particular repayment plan even if you are currently in school. Private Loans will not be considered either, since they are not government-owned. Any loans that are currently in default will also not be eligible. Direct PLUS loans made to guardians or parents, Direct Consolidation Loans paid to PLUS loans on behalf of parents and Family Education Loans are also not being considered by this program.

After you have established your loan type, you must be considered a person with partial financial hardship. This means that the amount you make annually must be lower than your qualifying debt. When I asked the Fed Loan Service Departments what that meant I was told, “If a graduate makes $30,000 a year, and has $30,000 in debt, then they would be a candidate for this program”.  Other qualifiers are your family size. I asked the Fed Loan Service if a laid-off spouse or live-in mother-in-law could be considered as family members, and I was told that “With income based repayment plans, they take family sizes into consideration, I believe that with Pay as You Earn, they may take them into consideration as well”.

Another interesting fact that I learned is about the role of how Adjusted Gross Income (AGI) is used when determining payments. In case you’re not familiar, AGI is the income you earn in a year through various sources like your job or alimony. Then, you minus any qualifying deductions you have through the year. This gives you your Adjusted Gross Income amount.  For single people, the calculation is based off of a 10% difference between your AGI and the Department of Health and Human Services Poverty Guideline, which is 150%. If you are married and file jointly, then the income of your spouse will be used to determine whether or not you will qualify. This may lessen your chances of falling into the partial financial hardship bracket if they happen to make a good amount of money. One option you have is too file your tax return as, married filling separately. This affords you the option of having just your AGI and student loan debt reviewed, not the whole picture. If both you and your spouse happen to have student loans and file a, married filing jointly return, then this might not affect you as much since they will look at both of your debts in determining payment amounts and options.

After the 20 years of payment, the government will forgive your loan, but not without you having to pay taxes on the remaining amount. The government treats the left over amount as taxable income so make sure to speak with an accountant to see how this will affect you in the future. For those in the public service field, the remainder balance is tax free and when I asked what the catch was, I was told, “ As long as a person started making payments after October 2007 and have made a total of 120 payments then is it considered tax free”. The more and more I learn about public service forgiveness, the more I am considering taking a different career route!

Although one of the most beneficial aspects of this program is that the monthly payments are capped at 10% of your income, the downside is that your payment amounts are reviewed each year. When I asked what that entails, I was told by the Fed Loan Department that, “We do reevaluate persons every year even if you have the same job; you will have to submit information yearly”. In other words, your payments are subject to change depending on your income and family size. If you fail to submit your paper work, then you will automatically be removed from the program and put into the 10 year Standard Repayment Plan which means your payments could double.

The problem that I am finding with loan repayment programs is that the fine print is hard to decipher; a problem that many students face when they are filling out financial aid documents. The language that is used requires a law degree to understand and that can spell trouble later on when its time to start making payments. As it stands currently, the balance of defaulted student loans sits at $19 billion and counting. A tall sign that change is needed. Obama’s intention with this new Pay as You Earn initiative is to hopefully help students get a better head start without causing another financial crisis. Yet, the lack of forthcoming information about non-qualifying barriers could prove to be one of its downfalls.  Students might assume that payments will be automatically deducted from each pay check as I did. This mentality could lead individuals to take out more loans than they should, deepening our country’s debt. If you are interested in figuring out how you will stack up when it comes time to repay, check out the Student Aid calculator. Here you will also find a link that will help you locate your loans if you are unsure where to start.

Having said that, going to school is the best way a person can help themselves and their family. Statically speaking, those who attain at least an Associate degree are worth on average about 2.2 million dollars over a life span, verse 1.1 million for individuals with only a high school degree. This number increases as a person furthers their education. But, that also means for some of us that student loans will be the only answer. As President Obama has been quoted saying, “We have an obligation and a responsibility to be investing in our students and our schools. We must make sure that people who have the grades, the desire and the will, but not the money, can still get the best education possible.” I personally believe that the other obligation he has is to cast a light on the hidden agenda behind the programs, as well as a responsibility to set upfront expectations on repayment options. As it stands currently, filling out Student Aid documents can feel like a blind leap of faith, faith we put into our country to catch us before we fall. American student loan borrowers deserve the right to know what life will be like after school. Not, as it currently stands, finding out right before they sign on the dotted line.  

Equal Access/Equal Opportunity
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