Is Obama’s “Pay as You Earn” Program Enough?

President Obama recently provided some potential relief to student loan borrowers. Introduced this past June, the plan caps student loan repayments at a more comfortable 10 percent of a borrower’s monthly discretionary income. Then after 20 years in what’s known as the Pay As You Earn program, any remaining student loan debt is forgiven.

Crippling student loan debt reaches $1.2 trillion

Currently, student loan debt is at $1.2 trillion and surpasses credit card and auto loan debt. The average amount owed by a graduate is a hefty $29,400.

A survey by Black Book Market Research found that since 2008, 94 percent of working college graduates report that their student loan repayments are unmanageable due to the size of the debt. Not to mention that many graduates are not earning as much as they thought they would be after college. This makes repayment based on discretionary income particularly attractive. (US News)

This new plan, which is scheduled to take effect at the end of 2015, is an expansion of a 2010 law that capped monthly repayments on new federal student loans. The current Pay As You Earn repayment option, which started December 2012, doesn’t apply to older loans or to people who haven’t borrowed since October 2011. The expanded plan will help those students who took out loans before October 2007 or stopped borrowing by October 2011. It does not apply to parent loans. The government estimates the amount of people who fit this category to be 5 million.

How much could you save with the new program?

How much you might save if you sign up with this Pay As You Earn program will vary, depending on the amount of your student loan debt and your income now and in the future. Individuals with high student loan balances who make a relatively low income for an extended period of time will save the most. This may be counterproductive for many people, whose goal it is to earn more over time.

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To determine how much you could save with this program calculate your savings with the Federal Student Aid Repayment Estimator.

Drawbacks to Pay As You Earn

Look carefully at the details of becoming involved in the Pay As You Earn plan, as there are some definite downsides, including the following:

  • You must complete reevaluation paperwork for the program annually.
  • Remaining debt is forgiven after 20 years, but for most borrowers, the balance is subject to federal income tax.
  • You may end up paying more interest in the long run. If your earnings climb as your career progresses during the 20 years until forgiveness of the loan, you’ll have to pay higher and higher payments, and as a result you’ll pay more interest than if you did standard repayment. You would only come out ahead if your income remains modest until the 20 years is up.

Marriage changes things. If you tie the knot, you and your spouse will take on each other’s student loan debts and your household income will increase. That means that your payments and interest are also likely to increase.

Is Obama’s Move To Ease Student Loan Burdens Enough?

Student loan assistance proponents argue that the Pay As You Earn program will not help the estimated 5 million borrowers that it’s supposed to. This is because of the various drawbacks, and the fact that many borrowers aren’t aware of the program or are too confused to enroll. To solve the latter problem, the Smarter Borrowing Act was proposed in 2013. It aims at lowering student default rates and would teach graduates about their various repayment options.

While student loan assistance programs do help, the bottom line is the $1.2 trillion in debt weighing down millions of graduates. A bill was introduced that would allow borrowers to refinance their student loans, but it was blocked in the Senate last June, taking the reform off of the table. Considering the ever increasing student loan debt and the inevitable defaults, it’s a pretty sure bet that refinancing student loans will come up again in the not too distant future.

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