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4 Must-Know Facts About Obama’s New Student Loan Plan
Nearly 5 million borrowers could be affected by expanded Pay As You Earn eligibility.
President Barack Obama announced some big news this week that stands to help many student loan borrowers .
Most people met the president’s proposed changes with excitement, even though it seemed like many didn’t exactly understand what the changes were or, even more importantly, how the changes may apply to them. So, let’s answer some big questions about the president’s executive action.
1. Will these updates help me? If you have federal student loans, maybe. With his executive action, the president expanded the existing Pay As You Earn program available to federal student loan borrowers.
Currently, this plan caps monthly payments at 10 percent of a borrower’s disposable income and forgives the balance after 20 years of payments. Those aspects of this plan won’t change.
What will change is the number of borrowers who can take advantage of this option. Currently, only newer borrowers are eligible for this plan. However, starting in 2015, borrowers who took out loans before October 2007 or stopped borrowing by October 2011 will now be eligible. Government officials estimate this number to be 5 million people.
2. How much could I save? Now, most federal loan borrowers are eligible for income-based repayment – a different repayment plan that has the same premise as Pay As You Earn.
Unlike Pay As You Earn, IBR caps payments at 15 percent of one’s disposable income and forgives the balance after 25 years of payments. Those differences could mean a lot, both in monthly payment amount and in the total amount paid over time.
For instance, consider a borrower who owes $55,000 at a 3.41 percent interest rate, has an income of about $35,000 per year, and is not married and has no other dependents. Here’s what that person’s payments would look like under three different payment plans: