By Katherine Ayers
Wednesday, January 9, 2013
More than 5,600 Pitt Community College and 20,400 East Carolina University students could get a break when it comes to paying back their student loans once they graduate.
Those eligible for the Pay as You Earn plan, that rolled out on Dec. 21, include new borrowers who took out William D. Ford Federal Direct Subsidized or Unsubsidized Loans, a Direct Plus Loan made to graduate or professional students or a Direct Consolidation Loan on or after Oct. 1, 2011,
According to the U.S. Department of Education, new borrowers are those who had no outstanding balance on a Direct or Federal Family Education Loan Program (FFELP) loan as of Oct. 1, 2007.
The Pay as You Earn program has advantages, according to the Department of Education’s Federal Aid website, namely:
It limits qualifying borrowers’ monthly payments to 10 percent of their discretionary income;
If the monthly payment does not cover the interest that accumulates on the principal loan amount, the federal government will pay the unpaid accrued interest for up to three consecutive years from the first date of repayment;
If a borrower is determined to have a financial hardship, interest that accrues but is not covered by the monthly loan payment will not be added to the principal amount (capitalized), and the total amount of capitalized interest during the life of the loan is limited to 10 percent of the original principal; and
The loan is forgiven after 20 years, or 10 years if a borrower is employed full-time for a public service organization.
Downsides to the repayment program include paying more interest through the life of the loan; borrowers must submit annual documentation so their monthly payment can be set; borrowers may have to pay taxes on any part of the loan that is forgiven after 20 years; and although all a borrower’s student loans are taken into account to determine if the borrower meets the Pay as You Earn program requirements, only Direct Loans are eligible for the program. Other loans must be paid through another repayment plan.
Julie Poorman, ECU’s financial aid director, said the new loan repayment program may not be the best option for everyone. Students who have been in school more than two years will have FFELP loans as well as direct loans and while the FFELP loans are considered part of the overall school debt a borrower owes, FFELP loans can not be repaid under Pay as You Earn.
“Students are left with a dual repayment, so it kind of defeats the purpose (of simplifying repayment),” Poorman said.
Poorman still recommends an Income-Based Repayment (IBR) plan for most borrowers which has a 25-year length and a monthly payment of 15 percent of a borrower’s income because all loans can be consolidated into one payment.
“You can get your payments down to what you can afford to pay monthly,” she said. “It’s far better to make on-time payments each month and not ruin your credit score then worry about the amount your paying each month.”
A good rule of thumb no matter what plan a student chooses is to not borrow more than you need for expenses, according to Poorman.
“The conversation that families and students need to have is what’s a want versus a need,” she said. “What can I earn and save (before and during college), and do I really need to borrow anything other than tuition, and maybe room and board?”
For more information about all loan repayment options available, visit http://studentaid.ed.gov.
Contact Katherine Ayers at email@example.com and 252-329-9567. Follow her on Twitter @KatieAyersGDR.
via The Daily Reflector.