Intro: President Obama's "Pay as You Earn" plan takes effect in 2012. New student loan borrowers will benefit from this plan that caps monthly student loan payments to 10% of discretionary income and forgives any remaining debt after 20 years ... making it easier for students to pay back their loans.
There are some caveats to this program borrowers need to consider.
First, the new plan benefits borrowers who took out loans in 2008 and later - and who take out a new loan in 2012 or later.
You must have at least one federal loan from the government (direct loan) and one loan that originated with a bank (guaranteed loan) to qualify.
Borrowers with private student loans do not qualify.
Your loans cannot be in default.
Borrowers who are already in repayment will not be eligible.
Borrowers must meet some salary-to-debt ratio conditions. IBR calculator here: http://studentaid.ed.gov/PORTALSWebApp/students/english/IBRCalc.jsp
It's estimated that 1.6 million borrowers will benefit from the new plan.
Mark Kantrowitz, publisher of the financial aid websites Finaid.org and Fastweb, says that while borrowers who took out loans before 2008 are excluded from the new "Pay as You Earn" program - they do qualify for the current, but little-known, Income Based Repayment Program that took effect in 2009.
Mark Kantrowitz (5:24-5:45)
"Part of the issue with the existing repayment plan is its been underutilized. Only 1.25% of borrowers in repayment are using this existing income based repayment plan. Which is kind of surprising. My estimates suggest that as many as 10% of borrowers could yield a financial benefit from adopting that plan."
The current Income Based Repayment program, or IBR - allows borrowers with federal student loans to have their monthly payments capped at 15% of borrowers' discretionary income and forgives any remaining debt, including interest, after 25 years. IBR is available to anyone with a federal student loan - with no date limitations.
The existing IBR plan started in 2009 and caps your payments based on what you earn and the number of people in your family. While this program casts a wider net than the upcoming "Pay as You Earn" program - the one main stipulation for both programs is that borrowers cannot be in default.
"Borrowers should contact their lender before they encounter financial difficulty, because you have more options like deferments, forbearances, and income based repayment before you default. Once you default you start you start losing options. So, it's better to not ignore the problem ... if you ignore the problem It just gets worse, it doesn't go away."
TAG: To calculate if you're eligible for the new and existing IBR program - visit the Department of Education's website http://studentaid.ed.gov/PORTALSWebApp/students/english/IBRCalc.jsp to crunch the numbers. For Bankrate.com, I'm Kristin Arnold.