Yesterday, President Obama signed an Executive Order expanding the “Pay-As-You-Earn” (PAYE) repayment plan option for federal student loan borrowers. PAYE is essentially a more-affordable version of the “Income-Based Repayment” (IBR) plan.
So what does this mean, exactly, and how will you be potentially impacted? These are some of the most common questions I’ve been getting:
What is IBR? In 2007, Congress and President Bush passed a law that created the Income-Based Repayment (IBR) program, which allows federal student loan borrowers to make payments on their federal student loans based on their income. The program caps monthly payments at 15% of a borrower’s discretionary income. After 25 years of payments under the IBR program, whatever balance remains is forgiven.
How is PAYE better than IBR? PAYE improves upon IBR by capping payments at 10% of a borrower’s discretionary income. To illustrate, a single borrower with $40,000 in eligible federal student loans with an income of $35,000 per year would have a monthly IBR payment of $220. Under PAYE, the monthly payment for the same borrower would be $145. Furthermore, under the PAYE program, a borrower’s remaining loan balance is forgiven after only 20 years, instead of 25 years under IBR.
So why not choose the PAYE plan now instead of IBR? When the PAYE program was created in 2012, the U.S. Dept. of Education limited the program’s eligibility to what it calls “new borrowers.” These are borrowers who had no outstanding federal student loan debt as of Oct. 1, 2007, and also took out a new federal student loan on or after Oct. 1, 2011. This locked out borrowers who had older loans.
And what does the President’s Executive Order do? The President’s Executive Order eliminates the “new borrower” eligibility restrictions on the PAYE program, meaning that borrower who took out loans prior to Oct 1., 2007, or did not take out a new federal loan after Oct. 1, 2011, will now be eligible.
Great! Where do I sign up? Not so fast. The program will not become effective until at least December 2015. The U.S. Dept. of Education has to issue new regulations governing the expanded PAYE program, and that is a long process.
Will this impact Public Service Loan Forgiveness? Public Service Loan Forgiveness (PSLF) is a separate federal loan forgiveness program whereby borrowers can get their remaining loan balance forgiven after 10 years of qualifying payments under the IBR or PAYE plans. Many borrowers were concerned after the President’s budget proposal offered a new “PAYE” plan that capped loan forgiveness at the 10-year point, and extended the repayment term of higher-debt borrowers to a 20-year term. The President’s Executive Order that he signed this week does not implement any of the proposed changes to loan forgiveness that were contained in his budget proposal, and the White House’s fact sheet on the Executive Order specifically mentions that “any remaining balance” under the expanded PAYE program is forgiven after 10 years of qualifying public service employment. Of course, additional changes to these programs could come in the future. But for now, this Executive Order does not impact the PSLF program.
Stay tuned as more information on this becomes available.