Making Student Loans More Affordable

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Federal government expected to expand popular student loan repayment plan.

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More Federal Direct Loan borrowers may soon be eligible for a Pay As You Earn (PAYE) repayment plan offering lower monthly payments and the opportunity to discharge outstanding debt sooner.

This summer, President Obama directed the U.S. Department of Education to expand PAYE to include more borrowers. PAYE is designed to make monthly student loan payments more affordable for borrowers experiencing economic hardship. Standard student repayment plans typically require borrowers to repay their total loan amount with interest. PAYE, by contrast, tailors monthly payments to a borrower’s income and forgives outstanding debt after just twenty years. Yet the current PAYE program is estimated to reach fewer than two million of the thirty-seven million borrowers with federal student loans.

Expanding PAYE will require changing PAYE’s eligibility requirements. The U.S. Department of Education is now forming a negotiated rulemaking committee to propose rule changes to the regulations governing the Federal Direct Loan Program, including the PAYE repayment plan. The committee will be comprised of government officials and representatives from affected interested groups who will meet to negotiate the new regulations.

Current eligibility rules for PAYE require that applicants must have taken out their first federal loan after October 2007, or, if it was a Direct Loan, after October 2011. While negotiations will not begin until February 2015, the most recent fiscal budget proposal by the U.S. Department of Education recommended an expansion of the plan to all eligible student borrowers, regardless of when they borrowed. This would mean the inclusion of borrowers who took out loans before 2007. According to the U.S. Department of Education, in 2007 borrowers owed over one hundred billion dollars in outstanding Direct Loans. The White House estimates that the expansion will aid more than five million of these borrowers.

Although other income-driven repayment plans exist for borrowers who do not meet the 2007 cut off, PAYE is more generous. Where Income-Based Repayment (IBR), an income-driven repayment plan available to pre-2007 borrowers, requires borrowers to pay fifteen percent of their discretionary income for twenty-five years before outstanding debt will be forgiven, monthly payments under PAYE are just ten percent of a borrower’s discretionary income and borrowers are eligible for debt forgiveness five years sooner.

PAYE has expanded before. It was originally intended to apply only to new borrowers who took out their first loans after July 1, 2014, but the U.S. Department of Education, guided by a White House initiative, implemented the program in November 2012. The accelerated implementation expanded PAYE benefits to post-2007 borrowers. Other recent efforts to help borrowers and promote the affordability of higher education include raising the Pell Grant award, creating the American Opportunity Tax Credit, and reducing the interest rates on new subsidized Stafford Loans to three and four-tenths percent.

The comment period for the negotiated rulemaking recently closed. After reviewing submitted comments, the U.S. Department of Education will publish a list of proposed committee members as well as topics to be considered by the rulemaking committee beyond the PAYE program.