Driving Change in Higher Education.

Now is the time to “Pay as You Earn”

Student loan program took effect on December 21, 2012

By Michael Flannery

MSCSA Public Relations Coordinator

A new approach to income-based federal student loan repayment, the “Pay as You Earn” program was scheduled by congress for program changes to take effect in 2014, however the Obama administration enacted regulatory measures to move up implementation to December 21, 2012. Now in effect, the program will allow qualified borrowers to limit their monthly payment to ten percent of their discretionary income, with loan forgiveness after 20 years. Previously, the program capped payments at 15 percent and offered forgiveness after 25 years. To find out more about the program check out. 

Two-thirds of the national college class of 2011 graduated with an average loan debt of $26,600. A 5% increase from the class of 2010, according to recent figures from the Project on Student Debt. At a time when student debt has surpassed $1 trillion, President Obama has touted this new program to ensure borrowers aren’t crushed by such atrocities of student debt burdens. 

To qualify for the program, borrowers must have started taking out federal loans after October 1, 2007 and received at least one disbursement following October of 2011. Additionally, borrowers must demonstrate financial need in relation to the standard repayment as a portion of their income. Maximum monthly payments will be set based on income and family size, which can adjust each year. Though there are possible downsides: Borrowers could end up paying more over the life of a loan by choosing a so-called Income-Based-Repayment, and documentation will have to be submitted each year. Also, it only applies to specific direct federal loans and will not apply to private loans from non-federal lenders and banks. 

The program also provides loan forgiveness after ten years to borrowers working in public service who have made all of their payments on time. An argument made by some critics is that the program could be an encouragement for students to borrow more than they should. However, it is meant to help graduates transition in a time when the economy is still recovering. The unemployment rate for people aged 20 – 24 in December of 2012 was 62.5 percent according to data from the Bureau of Labor Statistics. It is estimated that 1.6 billion borrowers could benefit from this program.

Some students have expressed concern about the program not having a set duration, meaning that the program could end suddenly leaving students having to pay a higher monthly payment when they may have already been struggling to pay the lower payment. 

Matt Rubel, a student from North Hennepin Community College had this to say about the program: “This program is definitely a step in the right direction. However, I feel that the federal government could be providing more incentive to the future leaders of this country. The program sounds great for people in public service, but what about the average student. The student who graduates with the intention of starting a family and buying a home, these students would ultimately give up 10 % of their discretionary income for 20 years. For a thirty year old graduate, they would be making payments within the program until they are fifty. A person who is fifty years old should be well on their way to saving for retirement. Higher Education in the United States has the power to bring serious financial gain, but it also has the power to create serious financial stress for those who are entering career paths to help society rather than for the money. These are the people that we need to look out for, the people who are in it for others, the people who would give someone the shirt off their back. They would face a period of twenty year financial stress. Would they then feel benefitted by the “Pay as You Earn” program?”

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