The recently launched student loan repayment plan dubbed; Pay As You Earn is expected to ease student debt situations. The United Stated Department of Education is expected to officially begin the new loan repayment plan for student loans on 21st December 2012. As the name suggests, the student loan repayment plan aims at providing lower student loan repayments for individuals in financial difficulty.
All loan repayment plans come with certain eligibility requirements that must be met. The previously instated IBR (Income Based Repayment) and the Pay As You Earn student loan repayment plan both require plan applicants to be in partial financial difficulty/hardship.
According to the United States Department of Education, partial financial hardship refers to a case whereby an individual is required to pay a higher repayment amount on an eligible federal student loan (under a ten year repayment plan) compared to the monthly repayment amount an individual is required to pay under the Pay As You Earn plan.
The standard student loan repayment plan sets a borrower up with fixed repayments monthly over a decade. This results in a very short repayment term which in turn makes it a suitable option for avoiding interest accumulation. It is however important to note that students who have huge amounts of debt end up having a very hard time meeting their repayment terms i.e. making monthly payments in time.
For instance, an individual with a total student loan debt of $10,000 normally pays approximately $84 monthly excluding interest over 10 years. In such a case, the monthly loan repayments are manageable. On the other hand, an individual with a student loan amounting to $60,000 normally pays $500 monthly which isn’t manageable at all under the standard student loan repayment plan.
The Pay As You Earn plan establishes monthly repayments that are adjustable according to a borrower’s income and monetary obligations. This plan sets monthly repayments at 10% of the discretionary income. In such a case, single monthly payments can never exceed the amount a borrower would pay under the standard student loan repayment plan.
The Pay As You Earn plan also includes loan forgiveness. If all monthly repayments are consistently met for two decades (20 years) or more, any unpaid student loan debt is eliminated. For individuals to qualify for student loan forgiveness after 10 years under the plan, they must be full-time workers in the public service. The new loan repayment plan is simply a variation of the (IBR) Income Based Repayment. The IBR establishes a 25 year repayment span of up to 15% of the discretionary income.
Individuals wishing to adopt the new student loan repayment plan must have taken their student loans on or after 1st October 2011. The individuals also need to have been new borrowers as of 1st October 2007. Examples of loans eligible to the Pay As You Earn plan include; direct, subsidized and unsubsidized loans. Loans such as Federal Family Education aren’t eligible for the plan however they are considered in determining the partial financial hardship of applicants. It is important to note that there is a calculator available for calculating payment projections. The plan was initially scheduled to be launched in 2014 however the federal government expedited the implementation process.
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