President Obama’s Pay As You Earn plan expected to help Americans manage student loan debt

President Barack Obama waves to the crowd after arriving at the University of Colorado Denver campus, in Denver, Colo., Oct. 26, 2011. The President delivered remarks on the steps the Administration is taking to increase college affordability by making it easier to manage student loan debt. (Official White House Photo by Pete Souza)

According to a White House press release, President Barack Obama is taking steps to help student load borrowers better manage their student loan debt by moving forward with a new “Pay As You Earn” proposal that will reduce monthly payments for more than 1.6 million people. Starting in 2014, borrowers will be able to reduce their monthly student loan payments from 15 percent to 10 percent of their discretionary income. But President Obama realizes that many students need relief sooner than that. The new “Pay As You Earn” proposal will fast track the initiative to begin next year.

The questions below will help you understand income based repayment and find out if you are able to take advantage of these changes.

1. What is income-based loan repayment?

Income-Based Repayment (IBR) is a repayment plan that caps your required monthly payments on the major types of federal student loans at an amount intended to be affordable based on income and family size. All Stafford, PLUS, and Consolidation Loans made under either the Direct Loan or Federal Family Education Loan programs are eligible to be included in the program. Loans currently in default and Parent PLUS Loans are not eligible for the income-based repayment plan.

The program lowers monthly payments for borrowers who have high loan debt and modest incomes, but it may increase the length of the loan repayment period, accruing more interest over the life of the loan.

2. Who qualifies for IBR?

IBR helps people whose federal student loan debt is high relative to income and family size. While your loan servicer (the company you make your loan payments to) will determine your eligibility, you can use the U.S. Department of Education’s IBR calculator to estimate whether you are likely to qualify for the plan. The calculator looks at your income, family size, and state of residence to calculate your IBR monthly payment amount.

If that amount is lower than the monthly payment you are paying on your eligible loans under a 10-year standard repayment plan, then you are eligible to repay your loans under IBR.

3. Will my eligibility change if I'm married? What if my spouse also has loans?

If you are married and file a joint federal tax return with your spouse, both your income and your spouse’s income are used to calculate your IBR monthly payment amount.

If you are married and you and your spouse file a joint federal tax return, and if your spouse also has IBR-eligible loans, your spouse’s eligible loan debt is combined with yours when determining whether you are eligible for IBR. If the combined monthly amount you and your spouse would pay under IBR is lower than the combined monthly amount you and your spouse are paying under a 10-year standard repayment plan, you and your spouse are eligible for IBR.

4. How will President Obama's changes help lower my monthly payments though IBR?

In the 2010 State of the Union, the President proposed – and Congress quickly enacted – an improved income-based repayment plan that allows student loan borrowers to cap their monthly payments at 15 percent of their discretionary income. Starting July 1, 2014, the IBR plan is scheduled to reduce that limit from 15 percent to 10 percent of discretionary income for all new borrowers.

The President today announced that recent graduates shouldn’t have to wait that long to see lower monthly payments. Pay As You Earn will limit student loan payments to 10 percent of a graduate's income in 2012, rather than having to wait until 2014. This cap will reduce monthly payments for more than 1.6 million borrowers.

5. How will enrolling in IBR affect my monthly payments compared to the standard repayment plan?

It depends on your income. But, take for example a nurse who is earning $45,000 and has $60,000 in federal student loans. Under the standard repayment plan, her monthly repayment amount is $690. The currently available IBR plan would reduce her payment by $332, to $358. President Obama’s improved “Pay As You Earn” plan — reducing the cap from 15 percent to 10 percent — will reduce her payment by an additional $119, to a more manageable $239 — a total reduction of $451 a month.

6. How will enrolling in IBR affect my payments over the life of the loan compared to the standard repayment plan?

In general, your payments will increase as your income does, but they will never be more than they would have been under the standard 10-year repayment plan. Although lower monthly payments may be better for some borrowers, lower payments may also mean you make payments for longer and the longer it takes to pay your loans, the more interest you pay compared to the standard repayment plan.

7. Is it possible my payments will be higher under IBR than they would under the standard repayment plan?

IBR will never cause your payments to increase more than they would have been under the standard repayment plan. It is possible, however, that your income and the size of your outstanding loan balance may mean that IBR is not beneficial to you. If your payments would be higher in IBR than they would be in the standard repayment plan, the IBR option will not be available to you.

Also, because a reduced monthly payment in IBR generally extends your repayment period, you may pay more total interest over the life of the loan than you would under other repayment plans.

8. How do I opt in to IBR?

To sign up for IBR, call your loan servicer. The loan servicer is the company that sends you your monthly student loan bills. If you don’t know who your servicer is or would like more information about your loans, such as the balance and interest rates, you can look it up on www.nslds.ed.gov. To see a list of and contact information for common servicers of student loans held by the US Department of Education, you may visit the Loan Servicer page.

9. How can I find out more?

Visit www.studentaid.ed.gov or call 1-800-4-FED-AID. You can also learn more about other student loan repayment options and find advice on paying loans off more quickly using the Consumer Finance Protection Bureau's Student Debt Repayment Assistant.

To find out about other changes to student loan programs, including President Obama's plan to allow borrowers to consolidate Direct Loans and Federal Family Education Loans, click here.