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Obama Introduces The New Pay As You Earn Plan Capping Student Loan Payments

Posted By Allmand Law Firm, PLLC || 15-Jul-2014

Springtime is supposed to be a joyful time for those who have graduated from college. However, for many members of the class of 2014, graduation means that they have left their student lifestyle behind, and they are about to meet their student loan debt obligations head-on.

Typically, this reality is felt the most six months after graduation, when grace periods on student loans end and monthly payments are set to begin. However, students who find themselves unable to afford their loan payments with their entry-level salaries (or can't afford payments due to unemployment) may be eligible for significantly lower monthly payments. Professional financial advisers for families preparing to send a child to college have noted that when a graduate's amount of debt is higher than their actual income, it is likely that this student is eligible for some kind of debt forgiveness or income-based repayment plan.

The Obama Administration Places a Priority on Pay As You Earn Programs

Indeed, the Consumer Financial Protection Bureau estimates that nearly 25% of new graduates are eligible for some kind of public service loan forgiveness program. The Obama administration has placed a priority on "Pay As You Earn" programs, in which federal student loan payments are capped at 10% of income, and the loan is forgiven after 20 years of on-time payments.

Additional Good News for Those Who Have Older Student Loan Debts

Older loans may be eligible to have monthly payments capped at 15%, and these loans could be forgiven after 25 years of timely payments. Additionally, these loans could involve an income-based repayment plan, where monthly payments are dependent on such factors as income, family size, and the total outstanding principal of a loan. All of the details concerning these loan repayment plans can be found at the Department of Education's website.

US Treasury Department Concerns

The US Treasury Department has taken a particular interest in student loan burdens out of a concern that they are weighing down on the economy. Indeed, Treasury officials have noted that it is a priority for them that students understand exactly what kind of education options they receive and for what amounts of debt, as it can be difficult to understand the magnitude of some student loan debts.

Financial Aid Expert Concerns

One flip-side to these Pay As You Earn plans is the likelihood that they might prevent young graduates from making large purchases - such as cars, residences, and appliances - due to the significant repayment periods of 20-25 years. Indeed, some financial aid experts are concerned that these income-based repayment plans still place young graduates on shaky economic ground.

Regardless of these concerns, though, income-based repayment plans have become increasingly popular since they were rolled out by the government. As the popularity of these plans means a larger bill for the government to cover, the Obama administration has recommended capping loan forgiveness programs for graduates entering public service at $57,500 per borrower, and requiring timely payments for 25 years.

Financial experts have noted that this cap may be addressing lingering concerns that student loan forgiveness programs actually inflame the student loan crisis by encouraging high tuition rates by universities and irresponsible borrowing by students who may have little chance of paying off their debts.

Categories: Student Loans
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