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What Obama’s student loan announcement means for you

Good morning!

As I discussed in a post yesterday morning, President Obama used an executive order to expand the Pay As You Earn program, which caps a borrower’s monthly payment at 10% of their discretionary income, and forgives their remaining balance after 20 years, but which prior to today was only good for students who fulfilled these two criteria:

  1. No student loans taken out before October 2007
  2. Some student loans taken out AFTER October 2011.

It’s unclear from the President’s official remarks what criteria Pay As You Earn will take on now, but he referred in his speech to opening up eligibility to “nearly 5 million more Americans.” This number is far less than the 37 million Americans the New York Fed counted in a 2012 report, but it’s certainly a big expansion.

Pay As You Earn vs. Income Based Repayment

Heretofore the best option available to all borrowers had been Income Based Repayment, which was similar, but less generous.

Rather than cap payments at 10% of discretionary income as Pas As You Earn does, Income Based Repayment caps payments at 15% of discretionary income (Note that “discretionary income” is defined as income less 1.5 x the Health and Human Services Poverty Guidelines for your state and family size).

Rather than forgive remaining balances after 20 years of on-time payments as Pay As You Earn does, Income Based Repayment forgives the remaining balance after 25 years.

An IBR-PAYE comparison with numbers

So what does this mean in numbers?

Let’s walk through an example of someone who finishes school with $60,000 in student loans and an annual salary of $50,000.

Under the Income Based Repayment option, they would pay $406 per month and after 25 years, they would have the remaining $2,978 forgiven. Over the course of those 20 years, they would send away $122k in payments.

IBR; click to enlarge

Under the Pay As You Earn option, they would pay just $271 per month and after 20 years, they would have the remaining 23,428 forgiven. Over the course of those 20 years, they would send away just $65k in payments; that’s about half the total payments under Income Based Repayment!

PAYE; Click to enlarge

It’s pretty clear to see how this can be a great option for certain borrowers. Sadly, according to the official remarks (Link to the entire video), the new eligibility will likely not go into effect until December 2015.

Filed Under: Paying for school

tracy collins

I am a freelance writer blogger social media marketer and content marketer with twelve years of experience in writing and blogging.

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