If you are experiencing financial problems and need to make lower payments on your student loans, you might want to consider the pay as you earn repayment plan. You must demonstrate financial hardship, be a new borrower as of October 1, 2007, and have received a Direct Loan disbursement after October 1, 2011, in order to qualify. This program is available for several types of federal student loans, including:
- Subsidized and Unsubsidized Direct Loans
- Direct PLUS Loans for graduate or professional students
- Direct Consolidation Loans (excluding those incorporating PLUS loans for)
Federal Family Education Loan (FFEL) Program loans cannot be repaid using this method, but your debt from those loans is taken into account when determining your eligibility for this program. You will need to choose another repayment plan for any FFEL loans you have.
Your monthly payments are calculated using the following criteria:
- The amount you owe on your loans
- Your adjusted gross income
- The size of your family
- Your federal income tax filing status
- Your legal residence
The repayment period for this plan lasts 20 years. The cost of your payments is recalculated annually, and you must provide your loan servicer with updated information about your income and family size each year. If you do not submit this data, you will no longer be eligible for lower payments or interest benefits. You can look up your loan servicer and other information regarding your federal loans using the Nation Student Loan Data System. If after 20 years, you have not fully repaid your loan, you could be eligible to have the remaining balance forgiven. You could owe taxes on the amount that is forgiven.
Borrowers who choose the pay as you earn program are eligible for interest payment. If your monthly payments do not cover the interest that accrues between payments, the government will pay that interest for up to three years on your subsidized loans. Any unpaid interest will not be capitalized, or added to the principal balance of your loan, unless you no longer qualify for financial hardship. This includes any interest that collects while you defer payments or are in forbearance. If you no longer qualify for financial hardship, the maximum amount of interest that can capitalize on your loan is 10% of your original principal balance.
Before applying for this loan, you should discuss your eligibility with your loan servicer. The Federal Student Aid website has a calculator that can help you determine whether or not you could qualify for this repayment plan. If you think the pay as you earn plan is best for your situation, you can apply at the Federal Student Aid site. Remember, you can change your repayment plan for federal student loans once per year. If you encounter problems making payments on your loan, talk to your servicer to see what your options are.