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Federal Student Loan Repayment Option Expands

Tuesday, June 10, 2014 at 6:26 PM

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Photo courtesy of ThisIsBossi/Flickr.

President Obama signed an executive memo earlier this week to offer a bit of relief to Americans saddled with student loan debt. The Pay-As-You-Earn loan repayment program will be expanded to a wider pool of borrowers, allowing them to cap their federal student loan payments at 10 percent of their incomes. StateImpact Ohio's Amy Hansen spoke with one Ohio financial aid counselor about the plan.

Ohio’s college graduates carry an average of $29,000 in student loan debt, according to The Institute for College Access and Success.

So President Obama’s recent call to expand the already-existing Pay-As-You-Earn, or PAYE, plan by basing monthly payments on borrowers’ incomes could offer some breathing room to those struggling with loan debt, said Randy Green, President of the Ohio Association of Student Financial Aid Administrators.

In the past, this particular repayment program was only available for students who had first borrowed federal money to pay for their education between 2008 and 2011. The Obama administration said the expansion will allow an additional five million borrowers, previously ineligible under the plan’s old rules, a chance to cap their student loan repayments at 10 percent of their incomes.

But one downside to the PAYE program is that borrowers could actually end up paying more over time.

The length of the standard loan repayment term is ten years. Borrowers with a job in public service, like at a government agency or a nonprofit organization, can have their remaining loan balances forgiven after making on time payments for a decade under PAYE, while those working a private sector gig will have their loan balance forgiven after 20 years. 

“It’s a less traditional way of making payments,” Green explained. “You don’t know exactly how much you’re going to be paying over the life of the repayment term, because you don’t know what your payments are going to be. The lower your monthly payments, the longer it’s take to pay off the loan, so the more you’re going to be charged in interest.”

And in that case, it doesn’t lower the overall cost of college, a point made by Republican U.S. House Speaker John Boehner after Obama signed the order.  Boehner calls the PAYE plan a “"much-hyped loophole” .

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