Graduating students at UNC Wilmington will soon be able to take advantage of a federal student loan repayment plan that bases monthly payments on a person’s income each year.  

The “Pay as you earn” plan is an expansion of the Income-Based Repayment plan that was implemented by the Obama administration in 2009. It caps a borrower’s monthly payment at 10 percent of their monthly income instead of the 15 percent cap provided by the original plan. Its purpose is to help borrowers with high loan debt who have a modest income after graduation manage their monthly payments.

In an example taken from the White House website, a nurse earning $45,000 with $60,000 in federal student loans would normally pay 15 percent of her monthly income under the standard 10-year payment plan, or $690 monthly. Under the traditional IBR plan, her monthly payment would be capped at $358.

The expansion will reduce it even further-to $239 monthly. This is a total reduction of $451 dollars a month from the standard 10-year repayment plan.

For UNCW grads, this new plan could come in handy. Of this year’s graduating class, 44 percent have applied for federal financial aid, and the average federal student debt for UNCW grads is $23,000 according to the university’s common data set. National trends also indicate that students are earning less, indicating a strain on graduates entering the workforce; average annual income has fallen 11 percent from 2007 to 2010 according to the Pew Research Center.

The plan was scheduled to be eligible for borrowers who take out loans after July, 2014. But in 2011, Obama made an executive order to allow borrowers to be eligible by the end of 2012.

Beth Casper, associate director of financial aid at UNCW, said that “pay as you earn” is still relatively new and the UNCW financial aid department is still learning the ins and outs of the program.

“They realized that the need is there much sooner, so they actually changed some of the existing income-based repayment plans,” she said.

UNCW’s financial aid office monitors students who use financial aid, said Casper. If there is evidence that a student is struggling to make monthly payments, the office will attempt to reach out to that student and offer them counsel.

The best time to discuss this new repayment plan with a financial aid counselor may be during exit counseling, the individual sessions that the financial aid office offers to graduating UNCW seniors.

Loans eligible for the “pay as you earn” plan include all Stafford, Grad PLUS and consolidation loans made under Direct Loan or Federal Family Education Loan programs.

There are several advantages to this new repayment option.  The government will cover interest that accumulates each month for the first three years of “pay as you earn” repayment. 

Your loan debt is also forgiven after 20 years of repayment under “pay as you earn.” In addition, under the Public Service Student Loan Program, a borrower employed full-time in public service can be eligible for loan forgiveness after 10 years of repayment. 

There are disadvantages, too.

Since a reduced monthly payment under “pay as you earn” will take more time to pay off debt, the interest over the total life of the loan might be more than it would be under a different loan.

A borrower’s monthly payments may increase or decrease depending on annual income changes. The borrower must submit documentation on income and family size yearly for adjustments in payment amount.

Borrowers can apply for “pay as you earn” repayment through the Department of Education and can utilize the DOE IBR calculator to determine whether they are eligible for program.

The calculator determines a monthly payment by looking at income, family size and state of residency. If the calculated monthly payment is lower than the payment would be under the standard 10-year plan, the borrower is eligible to start their repayments under “pay as you earn.”