Introduction
The U.S. Department of Education’s estimated cost for loan forgiveness for borrowers who took out loans after 2007 is about $65 billion over 10 years, according to a report from the Congressional Budget Office (CBO). The CBO looked at what might happen as a result of different types of student loan forgiveness programs that could extend beyond the current proposal offered by President Trump and other presidents before him.
President Obama announced a series of student loan repayment initiatives in March 2015. One of those initiatives was the expansion of the Pay As You Earn program, also known as PayE.
- If you’ve never borrowed money to pay for college, that’s great! Now go and get some.
- If you’re already a student loan borrower, there’s no need to panic; there are plenty of repayment plans available to help with those monthly payments. One of the most popular is Pay As You Earn (PAYE), which caps your monthly payments at 10% of your discretionary income—meaning, whatever amount left over after expenses like rent and food. This plan was created by President Obama in 2011 but has been expanded by President Trump since taking office in 2017.
- How does PAYE work? It’s simple: first, figure out how much money you make each year (your “discretionary income”). Then calculate how much money you owe on all federal loans taken out before October 2007—this includes both Direct Loans and FFEL Program loans (like Federal Family Education Loan Program loans). Finally, take this number and multiply it by 10%. That’s how much money goes toward repaying your federal student debt each month through PAYE!
The Pay As You Earn, or PAYE plan is just one of many income-driven repayment plans applicable for federal student loans.
If you find yourself struggling to make your monthly student loan payments, consider an income-driven repayment plan. These plans can help lower the amount of money you pay each month and give you more flexibility with your finances. However, there are some drawbacks to these plans that should be considered before signing up for one.
Income-driven repayment plans recalculate student loan payments based on income and family size. They also extend the length of time it takes to pay off loans—sometimes as long as 25 years—but interest rates are usually lower than they would be under standard repayment plans, which typically last 10 years. The PAYE plan is just one of many income-driven repayment plans applicable for federal student loans; here’s how to apply:
- First log into NSLDS (National Student Loan Data System) at https://nslds2.ed.gov/nslds/cslogin?cmd=pagemaster&prid=0&view=directory .
- Then click “Apply for IBR or Income Based Repayment Now!” under “Frequently Asked Questions About Income Driven Repayment Plans” near the bottom left corner of the page
So what exactly does PAYE do? For new borrowers, PAYE caps your federal student loan payments at 10 percent of your discretionary income, which is calculated by subtracting 150 percent of the poverty line from your Adjusted Gross Income (AGI) each year.
So what exactly does PAYE do? For new borrowers, PAYE caps your federal student loan payments at 10 percent of your discretionary income, which is calculated by subtracting 150 percent of the poverty line from your Adjusted Gross Income (AGI) each year.
For example, if you have an AGI of $50,000 and live in a state where the poverty line for a family like yours is $30,000, then you would be required to deduct $15,000 from that initial amount before determining what percentage of it can be applied to student loan payments. If your AGI was $60K and the poverty line was $40K per year in your state (whereas yours would have been $30K), then you would only have 20 percent ($12K) deducted from those initial numbers to calculate how much could go toward paying down loans under PAYE.
What’s more? After 20 years of qualifying payments on an undergraduate loan, the government forgives you any remaining balance.
The Pay As You Earn, or PAYE plan is just one of many income-driven repayment plans applicable for federal student loans.
Income-driven repayment plans are intended to help borrowers manage their monthly payments by setting them at a percentage of their annual income and allowing them to pay off their loans over a period of 20 years.
After 20 years, any remaining balance on your student loan will be forgiven.
Payments are lower under the PAYE plan than they are under the standard 10-year repayment plan that applies to all federal loans. With the standard plan, you pay a fixed amount each month and the loan is repaid after 10 years. The problem with this plan is that it doesn’t consider your individual economic circumstances and doesn’t adjust with income changes over time.
PAYE is a repayment plan that caps your monthly payment at 10% of your discretionary income. It also adjusts the amount you pay each month with changes in income over time. That means, if you have good job prospects and get a raise, for example, your payments will increase by the same percentage as your new salary.
The standard 10-year repayment plan applies to all federal loans except for parent PLUS loans and Perkins Loans. The problem with this plan is that it doesn’t consider your individual economic circumstances and doesn’t adjust with income changes over time.
Under PAYE you start with a much lower payment amount than you would under a standard 10-year repayment plan so if there is any remaining balance after 20 years, it will be forgiven in full as long as you are employed by a government entity or 501(c)(3) non-profit organization in public service at the time of forgiveness.
The PAYE repayment plan is a government-backed program that allows you to repay your student loans over 20 years at a reduced payment amount. The lower payment amount means you will pay less interest over time, and if there is any remaining balance after 20 years of payments, it will be forgiven in full as long as you are employed by a government entity or 501(c)(3) non-profit organization in public service at the time of forgiveness.
Though this sounds like an ideal situation for anyone who owes on their student loans, there are some drawbacks:
- You can only use the PAYE plan if your loan servicer recommends it (they may not)
- Only federal student loans qualify—private student loans do not qualify
- You must be working at least 30 hours per week during repayment
Biden’s newest proposal for student loan forgiveness
Biden’s newest proposal for student loan forgiveness is a long-term solution to the problem of student loan debt.
This plan would allow all borrowers to have any remaining balance on their loans forgiven after 20 years of payments. All current or future borrowers will be eligible for this program, including those who have already begun repayment or those who take out loans after it goes into effect. The proposal does not provide any details about how much will be forgiven per month or year and whether there is an income cap; that information could come later in the presidential campaign season.
It’s also unclear how much Biden would cost taxpayers if he were elected president—and whether he’d try to offset some of that cost by cutting other parts of his administration’s budget—but using federal tax dollars instead of private ones could help make the program more appealing politically.
What to know about Biden’s latest student loan forgiveness proposal
Biden’s latest plan is more forgiving than his previous proposals, which required borrowers to make payments for 25 years before qualifying for loan forgiveness.
The new plan would forgive up to $50,000 in student loans after borrowers have made 10 years of monthly payments. Borrowers must also be enrolled in an income-driven repayment plan and meet other requirements like maintaining satisfactory payment history, but the forgiveness applies regardless of whether or not you’re still paying off your student loans.
Who is eligible for student loan forgiveness?
Who is eligible for student loan forgiveness?
You may be eligible for student loan forgiveness if you have direct loans (subsidized and unsubsidized) or Federal Family Education Loan Program (FFELP) loans. Unless you took out a Perkins Loan, which never requires repayment, all other federal education loans are eligible. The following eligibility requirements apply:
- You must have been enrolled at least half-time in an eligible program at an eligible institution while making 120 qualifying payments on your Direct Loan or FFELP loan(s). If you borrowed through the Federal Family Education Loan Program (FFELP), these payments can include any type of payment plan — including standard, income-based and extended repayment plans — as long as the total 120 payments.
What specific types of student loans are eligible to be forgiven?
In order to be eligible for student loan forgiveness, you need to have the right type of loan. It’s important that you know what kind of student loans you have so that you can find out if they’re eligible for forgiveness.
- All federal loans (Direct Subsidized, Direct Unsubsidized, Grad PLUS) are eligible for forgiveness
- All private loans (Direct Unsubsidized and Grad PLUS) are eligible for forgiveness
- All graduate school or professional school student loan payments are also eligible (Direct Graduate PLUS)
What types of repayment plans are eligible for forgiveness?
You can have your loan forgiven if:
- You are on the standard repayment plan or pay-as-you-earn repayment plan.
- You are under the income-based and income-contingent repayment plans.
- You have made the required payments for at least 20 years while on an income-driven repayment plan.
What can you do while you wait for more information?
If you are waiting for more information about student loan forgiveness and have student loans, there are a few things that you can do while you wait.
First, pay off your loans as quickly as possible. The less money you owe them, the better chance there is of having them forgiven. Second, consider income-driven repayment plans or refinancing your loans if they haven’t been fully paid off yet. These options will help reduce how much interest accrues over time and make it easier for students with high debt to pay back their loans sooner than later.
Thirdly, consider consolidating multiple federal student loans into one single payment plan (like PayOff). This will give borrowers a lower monthly payment amount but keep all their outstanding debt under one roof so they don’t have to worry about missing payments or forgetting which account they owe money on at any given time! Finally – even though we’re not sure what kind of job changes might make sense in this economy… job hopping might be worth looking into because many employers offer bonus incentives when employees stay employed longer than six months!
Eligibility is based on your income and debt.
You’re eligible for loan forgiveness if:
- You have a federal student loan.
- You took out that federal student loan on or after Oct. 1, 2016.
- Your monthly payments are being made through an eligible repayment plan (see below).
Conclusion
While the current student loan forgiveness programs have limitations, Biden’s latest proposal may open up thousands of new opportunities for borrowers who want to pursue their dreams and make a bigger difference in the world.