Obama’s Executive Order “Pay as you Earn plan”

by Emily on November 7, 2011

As the tuition cost of college and higher education increases each year, so does the need for students to take out loans to finance their education. In 2011, student loan debt was higher than credit card debt for the first time ever in United States History. With student loans high and full time job prospects after graduation low, the Obama administration’s plan to solve this problem is a new executive order called “ Pay as you Earn” plan. Student loan payments will become due for most borrowers at some point this month.

If you are facing the prospect of repaying your student loans in the coming weeks and you are unemployed or under-employed make sure you carefully look over all of your loan documents. You should look into the possibility of consolidating your loans. Go to the Department of Education’s website and calculate if it makes fiscal sense to consolidate your loans. You may find that consolidation woks for you, and you will be able to lower your interest rate and make a single loan payment monthly.  You can also extend the period of deferment of your loans. Be sure to check which of your loans qualifies for this option.

Student loan repayment can be a large source of stress in your life, but you can lessen your stress by educating yourself on all of your options. If you feel uncomfortable with all the legal and financial jargon on the website, call your lender and have them explain to you in simple, clear information what you can do to help you pay your loans. Another option is to call your school and speak with the financial aid director, even though you are an alumni, they can still help you understand your student loans. As always make sure you read all the documents that are attached to any changes you make to your student loans. Print out documents that are on the internet and carefully read them to be sure of the financial actions you are taking.  You do not want to ignore your student loan obligations, as this will affect your credit score, and can affect you being able to finance a property or a car later on in your life. By educating yourself on the ins and outs of your student loans, you will be able to manage your bills and stress less.

The “ Pay as you Earn” plan calls for an income based repayment plan. This plan is designed to cap student loan payments at 10% of a borrowers discretionary income. This is a reduction from the current rate of 15% of a borrowers discretionary income. This reduction is set to take effect in 2012, instead of 2014, which was the initial plan. In order for borrowers be eligible for the income based repayment plan, make sure to check out the U.S. Department of Education’s website. Use the income based repayment calculator which will take into account your income, family size and state of residency and will come up with a monthly payment amount.  The main consideration for eligibility of the program is the ratio of your income to your debt.

The executive order also changes the number of years in which student loan forgiveness kicks in. If you work for 10 years in a public service sector, any remaining balance of your student loans will be forgiven after that time. If you are in the private sector, remaining student loan balance will be forgiven after 20 years now, instead of 25 years.

Additionally the executive order will give borrowers a discount on their interest rates with consolidated loans. If you loans from the Federal Family Education Loan Program and a direct loan, you qualify to consolidate them at an interest rate of up to half a percentage point less than the loan’s current interest rate. By consolidating your loans, you will have one single payment at a fixed interest rate instead of multiple interest rates and multiple payments.

Although it seems that there are many positive aspects of the program, one of the negative aspects is that it only applies to federal student loans. If you have a loan from a private institution such as a large bank, those loans are not eligible for the program. Be sure to check out which types of loans you have, and which financial institution holds your loans.

The executive order put into effect by the Obama administration may help you as a borrower or it may not make much of a difference to your student loan repayments. In order to determine if the plan can help you, make sure you contact the financial institution that holds your loans, be it private, federal or a combination of both.  Educating yourself on your personal student loan scenario, can only help you make the payments easier and hopefully you will be able to be free from student loan debt sooner than you thought.

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