If you are struggling with student loans that you took out before October 2007, there is a new, more generous option in the works that may help you manage your debt payments.
In June, President Obama signed an executive order that expanded the “pay as you earn” program, known as PAYE. The program caps monthly student loan repayments at 10 percent of your income and allows any balance remaining after 20 years to be forgiven.
The program has been available since late 2012 for some borrowers (those who took out their first loan after Sept. 30, 2007, and who were still borrowing after September 2011). But the president’s order widens the pool of eligible borrowers to include those with older loans or who stopped borrowing by October 2011. The administration says the expansion could make the option available to millions more student borrowers.
There is a catch, however. To give the government time to carry out the expansion, it won’t become available until late next year.
What if you need help now?
You can consider other programs already in place, like income-based repayment, or I.B.R. It is one of several income-driven programs available to help borrowers manage educational debt. Details of the programs vary, depending on the type of loan and when you borrowed the money. Terms are less generous than with PAYE, but they can still make a big difference in your monthly payment if you have high debt relative to your income.
I.B.R. is the most broadly available option, covering new and older loans. I.B.R. “classic,” as it is known by some student debt aficionados, caps monthly repayments at 15 percent of your income and allows any balance remaining after 25 years to be forgiven. I.B.R. classic is an option for both direct loans — those made by the federal government — and older loans made by private lenders and guaranteed by the federal government, under a program that concluded in 2010. The PAYE option, by contrast, is available only for direct federal loans.
(Last month, an updated version of I.B.R. became available for new borrowers, offering a cap of 10 percent of your income and a 20-year discharge period. But that is just for students taking out their first loan after July 1.)
Evaluating the different repayment plans, with their varying requirements, can be confusing. That’s unfortunate, because strapped borrowers may be overwhelmed by the choices and end up doing nothing, said Persis Yu, a lawyer with the National Consumer Law Center. Consolidation of the various programs, she said, would be a welcome change.
Here are some questions about income-driven repayment programs:
Q. How do I know if income-driven repayment is right for me?
A rule of thumb is that if your total debt exceeds your annual salary, then you may benefit from programs like I.B.R. and PAYE, said Mark Kantrowitz, a student loan expert and the publisher of Edvisors.com.
Lauren Asher, president of the Institute for College Access & Success, urges borrowers to avoid getting bogged down in the programs’ details. Instead, you can go to studentloans.gov and apply online for the program offering the lowest payment for which you are eligible. (You can plug information about your loans and income into the Education Department’s repayment estimator to get an idea of what your payments would be under the various options.)
For quick reference, the institute provides a summary of the current income-driven repayment options.
Q. How is my income factored into my payments under the I.B.R. and PAYE programs?
Payments for both programs are based on a percentage of your “discretionary” income, or what you earn above 150 percent of the federal poverty line — $17,505 for a single person in 2014. So if your income is $40,000, your discretionary income is $22,495.
Under the original I.B.R. program, for instance, someone with that income and $60,000 in debt would have an estimated initial monthly payment of $281, according to an example from the Education Department. (Under the revised I.B.R. program for new borrowers — as well as under PAYE — it would be around $188.)
By comparison, your payment under the standard, 10-year repayment plan — with no income-driven relief — would be about $738, according to the department’s estimator.
Q. If I’m in default on my student loans, can I qualify for income-driven repayment plans?
Your loans must be in good standing to be eligible.
Originally published here by the New York Times.