Repaying a student loan is not as easy a task as taking out one. A borrower can find oneself caught in a difficult financial situation while repaying a student loan. However, there can be various ways to help an individual pay off a loan. One such way is a suitable repayment plan that corresponds with the borrowers’ financial condition and facilitates one in repaying a student debt. Some of these plans are income- based repayment plan, Income- contingent repayment plan, Pay as you earn plan, Income sensitive repayment plan, standard repayment plan and graduated repayment plan, extended repayment plan et cetera.
Under the Pay As You Earn Repayment Plan, the maximum monthly payment towards the student debt is reduced to ten percent of the discretionary income. Discretionary income is the difference between the borrowers’ income and one hundred fifty percent of the poverty recommendation with respect to one’s family size and residence state, with some other terms and conditions also applicable. U.S. Department of Health and Human Services maintain the poverty recommendation to be used. Since the repayment is based on a borrower’s earnings, therefore, the repayment amount changes along with any change in the income. The borrower is supposed to make loan repayments for a time period of 20 years, after which the remaining amount of student debt in the name of the borrower is forgiven by the federal government.
Eligibility for Pay As You Earn repayment plan
The Pay As You Earn repayment plan is available on Direct Unsubsidized and Subsidized loans, Direct PLUS loans availed by students. Consolidated Direct loans that do not include Direct or FFEL PLUS loans are also eligible for this repayment plan only if they are not taken out by the parent. To avail this repayment option, the borrower must be a new borrower who has availed debt on October 1, 2007 or later and has received a disbursement of loan on October 1, 2011 or later. Along with this, the borrower should have a partial financial hardship in order to avail this repayment plan.
If the annual loan repayment amount on a standard repayment plan of ten years is higher than the annual repayment required to be made under income- based repayment plan, the borrower is said to be in partial financial hardship. The borrower needs to submit an offline or online Income- driven repayment plan request application that can be obtained from one’s loan servicer. Once the borrower has chosen the best suited repayment plan, he/ she needs to provide some income related documents. Document showing Adjusted Gross Income (AGI) can serve this purpose if the borrower has filed for an income tax return in past two years and the income on the most recent income tax return is the similar to current income. Some other income information documents can be used in the absence of these conditions.
Benefits and Limitations of Pay As You Earn repayment plan
Pay as you earn repayment plan allows the borrower to repay the student loan in a time span of twenty years instead of ten years as required by the standard loan repayment plan. This helps in reducing the monthly payments considerably and improving the financial handling of a loan by the borrower. This might help a borrower to realize some savings and manage his budget more effectively. Secondly, once the borrower has made the required qualifying payments for twenty years, if there is still some debt remaining, it is eliminated by the federal government and the individual is no longer liable to pay it off.
Along with these benefits, such repayment plans help the economy as a whole by lowering the instances of default and strengthening the economy.
Pay As You Earn repayment plan mainly contains two limitations. In spite of reducing the monthly payment made towards debt to only 10 percent of the discretionary income, Pay As You Earn repayment raises the total amount of repayment made towards debt when compared to the standard ten year repayment plan. This happens because the time frame of repayment increases to twenty years and hence, even though monthly payments are low, the aggregate comes out to be much higher. Also, one the borrower has made qualifying payment towards debt for twenty years, the remaining debt is forgiven. What comes as a shock to the borrower is the tax implication that follows. Amount of discharge of student loan is considered to be taxable income. This is sometimes referred to as government’s way of giving from one hand and taking away from the other.
Pay as you earn repayment plan definitely offers multiple benefits to an individual who is serious to repay his/ her student loan. However, like everything, it has its own set of pitfalls. It therefore becomes necessary for a prudent borrower to analyse all the terms and conditions of all repayment plans available and then choose the best suited plan. Also, a borrower also has an option to switch to another student debt repayment plan in case he finds himself unable to pay for monthly loan repayment under a particular repayment plan. What is important for an individual is perfect knowledge about every plan and the required amount of dedication to fulfil the selected plan of repayment.