The final rules and guidelines were released yesterday that can finally give us some guidance on a government student loan repayment program that can make it easier for many people.
The Pay As You Earn program will provide much needed relief to more people that are drowning under a trillion dollars of student loan debt. The only downside here is that the program has no power over private student loans.
The good news is that the PAYE program has the potential to make needed student loans more affordable and reasonable for students.
The Pay As You Earn program is for borrowers after October 1, 2007 and it establishes a 10 percent payment cap, down from 15 percent, for those experiencing a financial hardship. That’s good news.
The final rules revel a new ICR (Income Contingent Repayment) program will roll out.
Major changes include:
Allowing Perkins and Federal Family Education Loans (FFEL) to apply directly to the Department of Education for disability discharge. This will streamline an otherwise convoluted past process.
Allow student loan discharge to match the determination based on that established by the Social Security Administration and eliminate the past different systems.
For borrowers that qualify under the Income Contingent Repayment program and make 20 years of payments, the balance due will be forgiven.
Cleaning Up the Landscape
This is a moderate step forward for student loan borrowers in general but a big step forward for anyone that may experience a temporary or permanent disability after taking out a federal backed student loan.
Up till now the stories of bureaucracy have been disturbing for those that have struggled to obtain a student loan discharge due to disability. Imagine being determined to be disabled by one government agency, the Social Security Administration, but that’s not good enough for the Department of Education. That’s exactly what has happened up till now.
Take the case of Tina Brook’s. She was a police officer who fractured her spine and was disabled during a training exercise after she fell down the rock wall of a quarry. While Social Security ruled she was permanently disabled in 2006, that wasn’t good enough to discharge her student loans.
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Her application to discharge her student debt had been approved by the lender and the guarantor in 2005. But soon after her disability approval from Social Security, Brooks received a letter saying that she needed to resume her payments on her student debt. It came from Affiliated Computer Services (ACS), a contractor hired by the Education Department to provide customer service and manage information for programs including the disability discharge review. – Source
Under the new rules, borrowers that believe they qualify for disability determination and who may be struggling to make student loan payments, only need notify the loan servicer they intend to apply for a disability discharge and collection efforts must suspend efforts to collect for a period not to exceed 120 days.
Pay As You Earn Details
Eligible loans for the PAYE program include any outstanding loan made to a borrower under the Direct Loan Program or the FFEL Program except for a defaulted loan, a Direct PLUS Loan or Federal PLUS Loan made to a parent borrower, or a Direct Consolidation Loan or Federal Consolidation Loan that repaid a Direct PLUS Loan or Federal PLUS Loan made to a parent borrower.
Those eligible for the PAYE program must be able to demonstrate a partial financial hardship.
For an unmarried borrower or a married borrower who files an individual Federal tax return, the annual amount due on all of the borrower’s eligible loans, as calculated under a standard repayment plan based on a 10-year repayment period, using the greater of the amount due at the time the borrower initially entered repayment or at the time the borrower elects the Pay As You Earn repayment plan, exceeds 10 percent of the difference between the borrower’s adjusted gross income and 150 percent of the poverty guideline for the borrower’s family size
For a married borrower who files a joint Federal tax return with his or her spouse, the annual amount due on all of the borrower’s eligible loans and, if applicable, the spouse’s eligible loans, as calculated under a standard repayment plan based on a 10-year repayment period, using the greater of the amount due at the time the loans initially entered repayment or at the time the borrower or spouse elects the Pay As You Earn repayment plan, exceeds 10 percent of the difference between the borrower’s and spouse’s AGI, and 150 percent of the poverty guideline for the borrower’s family size.
What this means is that basically, borrowers that have a financial hardship will be able to limit their student loan payments to 10 percent of the difference between their adjusted gross income for that part that exceeds 150 percent of the poverty guideline as determine by the Department of HHS. The latest poverty income numbers can be found here.
Once the financial hardship is over, regular payments may resume.
At least a little bit of good news is on the horizon for government backed student loan borrowers who are struggling.