Pay as you earn; A step in the right direction

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With the rising cost of education and the flooded job market, new graduates may be finding it difficult to make the earnings necessary to repay student loans while living a normal life. Recently implemented by the Obama Administration, the Pay As You Earn plan was created to aid struggling grads in the repayment of their student loan debt.

If a recent graduate meets the requirements of the program their loan payments may be altered to match the income they are currently making. Essentially, it will cap the monthly payment to a manageable rate and is aimed help the borrower abstain from defaulting.

One of the plan requirements states a qualified applicant must be a “new” borrower as of October 2007 and must have received a disbursement after October 1, 2011. Additionally, the payments can increase or decrease each year, based on income and family changes.

With the crippling amount of student Financial Aid debt rising $64 billion in the last 10 years to $169 billion, the default rate is also on the rise. The Department of Education reports the 2010 two-year cohort default rate is at 9.1%, but seven years prior it was at 4.5%. The Pay As You Earn plan might just be what struggling graduates, and drop outs, need to get back in the green with lenders and lower the default rate.

The downside to this plan is that a lower payment means a longer pay off period and more interest accrued on outstanding debt. Before jumping into this plan, consider future circumstances and where that extra money this plan is freeing up is actually going. Nonetheless, this is a positive step in helping manage the high cost of education. To obtain more information about the plan and qualification requirements visit studentaid.gov/payasyouearn.