Money Talks, So Should You

Uncle Sam’s ‘Pay As You Earn’ plan can lower grads' debt payments

Brian O'Connell
by Brian O'Connell, MainStreet contributor

NEW YORK (MainStreet) — A September study by the Pew Research Center shows that almost one-in-five U.S. households — 19 percent — owed student loan debt in 2010, and that’s double the amount of student loan debt owed by U.S. students and families in 1990.

But the U.S. Department of Education is rolling out some rules geared to lower short-term student loan payments and tie those payments to the total income earned by the loan recipient.

The plan, officially known as “Pay As You Earn,” is straightforward: The borrower’s monthly payments are capped based on the amount of monthly earnings. Uncle Sam has a new policy capping loan payments at 10 percent of the discretionary income of student loan borrowers.

READ: Amid student loan tussles, more seek "forgiveness"

The federal government estimates that up to 1.6 million Direct Loan borrowers are eligible for Pay As You Earn. The Department of Education already has a program called Income-Based Repayment, which raises the 10 percent cap to 15 percent of discretionary income. The government reports that 1.3 million student loan borrowers already qualify for that program.

The department says that borrowers who aren’t eligible for Pay As Your Earn can qualify for the Income Based Payment plan.

In a statement released by the agency, government officials say the initiative is aimed at “struggling” borrowers such as teachers and nurses “in lower-paying public service careers.”

READ: Five key points to know before taking out a student loan | Video

“These income-driven plans could reduce monthly payments to help ensure that borrowers are able to manage their debt and avoid the negative consequences of defaulting on their student loans,” the department says. “While borrowers may pay more in interest in the long run under an income-driven plan, those options can provide some relief on loan payments, especially in a borrower’s early years of repayment.”

To figure out where you stand on Pay As Your Earn, the department has a website dedicated to the program.

Brian O’Connell has 15 years of experience covering business news and trends, particularly in the financial, health care and career management sectors. He has written 14 books and appeared on CNN, Fox News, CNBC, C-Span, Bloomberg, CBS Radio and other media outlets and in such publications as The Wall Street Journal and The Street.com. He is a former Wall Street bond trader.