NEW YORK (MainStreet) For many federal student loan borrowers, the most noteworthy part of the $1.1 trillion compromise budget passed by Congress earlier this month is what's missing: mention of the much-anticipated Pay As Your Earn (PAYE) federal student loan harmonization proposal, which would extend PAYE's benefits to all eligible federal student loan borrowers including those currently under less-favorable programs, such as the Income Based Repayment (IBR) plan. The proposal, which appears to have been omitted from the approved budget plan, could've also saved the broader economy about $15 billion.
This is disappointing for many borrowers facing financial hardship, but it also highlights the difficult economic prospects of a generation mired in record levels of debt. As aggregate student loan levels exceed $1.2 trillion, and individual loan balances exceed $29,000, many young borrowers see their future prospects tied to their ability to manage their debt.
The Financial Benefits of PAYE
PAYE, which caps monthly federal student loan payments at a maximum of 10% of a eligible borrower's disposable income and offers forgiveness of any remaining loan balance after 20 years of on-time payments, is only available to borrowers with no federal loans prior to October 2007 and who received a federal loan disbursement on or after October 2011. For borrowers who do not meet these program requirements, there is IBR, which caps monthly payments at a maximum of 15% of disposable income and offers loan forgiveness after 25 years of payments.
Though the differences between the two plans appear to be relatively small, PAYE can offer significant savings advantages over IBR. Under the IBR plan, a single borrower with a $29,000 student loan burden at 5% interest but only a $25,000 income (not atypical for recent graduates who meet the "financial hardship" requirement for these programs), would pay about $97 per month or nearly $51,000 in total payments including interest over the 25-year repayment horizon.