Graduate borrowers, consider this student loan plan before July 1

Starting July 1, the Department of Education will limit enrollment in three income-driven repayment (IDR) plans, which cap monthly student loan payments at a certain portion of income and can potentially forgive remaining debt .

The biggest change: The Pay as You Earn (PAYE) plan will close all new signups starting July 1. If you are already on PAYE, you will remain on the plan.

“Any borrower who has significant debt and thinks they will get forgiveness under an income-driven plan should consider whether paying as you earn can save them more money over time,” says Betsy Mayotte, president and founder of The Institute of Student Loan Advisors.

If PAYE is your way to pay the least over time, apply as soon as possible. As long as you submit a PAYE application before July 1, you will access the plan if your application is approved, even if that approval comes after July 1, a Department of Education spokesperson told NerdWallet on June 6.

Two other IDR plans, Income-Driven Repayment (ICR) and New Income-Based Repayment (New IBR), will also close to some borrowers in July.

Here’s who should act before the deadline, what these July 1 changes could mean for you, and how to prepare.

Borrowers with higher education loans or high future income should consider PAYE

PAYE is a good fit for some borrowers. Review the plan carefully if you find yourself in any of these situations:

• You have debt for your higher education. You can get forgiveness after 20 years of payments on PAYE if you have higher education loans, compared to 25 years on other popular plans, like Saving on a Valuable Education (SAVE).
• You hope to earn a high income in the future. PAYE payments are capped at 10% of your discretionary income, but even if your income increases in the future, payments will never be higher than they would be under the standard 10-year repayment plan. Most other IDR plans do not have this payment cap, which can result in very large student loan bills for some high earners.
• You are eligible for PAYE. If you had no outstanding Direct Loan or FFEL program loan debt as of October 1, 2007, and you took out a Direct Loan on or after October 1, 2011, you may be eligible for PAYE. You must also have partial financial hardship to qualify for the plan: This is generally true if your total federal student loan debt is greater than your annual discretionary income.
• You are not eligible for the new IBR. The New IBR plan is almost identical to PAYE, but it requires that you initially took out a student loan on or after July 1, 2014.

“PAYE is really beneficial for people who might be married and earning a good income with their spouse, or for people who expect a well-paying job in the future or already have one and are not eligible to the new IBR plan,” says Emma Crawford, a certified financial planner specializing in student loans at Perk Planning, a financial planning company based in Madison, Wisconsin.

For example, future doctors who earn less during residency but have high earning potential may be a good fit for PAYE, Crawford says.

Borrowers seeking Public Service Loan Forgiveness (PSLF) and who expect their income to increase in the future should also consider PAYE due to the monthly payment cap, says Jantz Hoffman, executive director of Certified Student Loan Board of Standards, a nonprofit organization that helps financial planners. and their clients make student loan decisions.

Register for PAYE online or through your service

The Ministry of Education’s loan simulator can help you estimate your repayment journey under different repayment plans.

If you determine that PAYE is your best option, start your application as soon as possible and submit it no later than June 30. Enroll in the plan online by completing the application at StudentAid.gov/IDR or contact your federal student loan servicer directly.

“The easiest and quickest way to apply is at studentaid.gov using the tools available, provided the borrower provides the linked tax return through studentaid.gov for their income documents,” says Hoffman. “If for some reason their income has changed and they are providing a pay stub instead, it is best for them to complete a paper form and upload it to their loan servicer.”

Those currently enrolled in PAYE can remain on the plan

If you are already registered for PAYE or apply before July 1 and your application is approved, you will be able to make payments on the PAYE plan until your loans are repaid or your debt is forgiven.

However, if you decide to switch to another repayment plan in the future, you will not be able to re-register for PAYE.

“It becomes a one-way exit,” believes Mayotte.

If you believe you have been wrongly denied PAYE, Hoffman suggests filing a student loan complaint with the Department of Education Ombudsman.

Income-driven repayment will only accept parent PLUS borrowers

Beginning July 1, the ICR plan will only be available to borrowers with a direct consolidation loan containing a parent PLUS loan. The plan has a repayment term of 25 years and caps payments at 20% of discretionary income, rather than 5% to 15% with other plans. As a result, ICR is not the best solution for the majority of borrowers, so this change won’t have a big impact, Hoffman says.

However, it might be worth looking into ICR if it can offer you the lowest monthly payment and you’re close to the 25-year discount finish line (or the finish line 10 years, for the PSLF), says Mayotte. Although it’s rare, ICR may offer you the lowest payment if you have a very high income compared to what you owe, Mayotte adds.

The new IBR plan will be closed to borrowers registered with SAVE

The New IBR plan is very similar to PAYE: it can forgive graduate debt after 20 years of payments capped at 10% of your income, compared to 25 years on other plans like SAVE. The main difference is that you must have taken out a student loan on or after July 1, 2014 to access the new IBR. You can access PAYE if your loans are older than this.

Starting July 1, borrowers who spend at least 60 months (five years) on the SAVE repayment plan will no longer be able to enroll in the new IBR.

This change aims to fill a gap for borrowers with graduate loans, Mayotte says: “They’re trying to make sure people don’t cheat the system by getting extra benefits and reduced payments from SAVE, then turn around last moment. minute to the new IBR to obtain the 20 year pardon.

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The article Graduate Borrowers, Consider This Student Loan Plan Before July 1 originally appeared on NerdWallet.

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