AP Photo/Jacquelyn Martin
President Obama announced an expansion of his income based education loan repayment plan Monday, extending the "Pay As You Earn" program to 5 million people who were previously ineligible.
The PAYE plan allows borrowers to repay their loans through monthly payments equal to 10% of their annual discretionary income, with the government forgiving any debt remaining after 20 years. The President's executive order will open the PAYE plan to people who had taken out a loan before October 2007 or had not recieved a secondary payment since October 2011, groups that are currently unable to participate in the program.
Via the Department of Education, here's how to determine if you are eligible for the PAYE plan:
To qualify for Pay As You Earn, you must have a partial financial hardship. You have a partial financial hardship if the monthly amount you would be required to pay on your eligible federal student loans under a 10-year Standard Repayment Plan is higher than the monthly amount you would be required to repay under Pay As You Earn.
The Standard Repayment Plan predetermines a payment program for a monthly set amount over $50 during a set number of years. While the monthly payments tend to be higher than other plans, the overall time spent repaying the loan is typically shorter.
We used the DOE's repayment plan calculator to show the difference between the PAYE plan and the Standard Repayment Plan. We input a $40,000 direct subsidized loan at 3.9% interest rate, and a $50,000 annual income for a one person household:
While the PAYE plan takes two years longer, it also requires a smaller monthly payment. However, the borrower would eventually pay more overall through the PAYE plan.
Only direct federal student loan loans are eligible for the PAYE program.
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