By Zachary Ehrlich  Updated on Tue Aug 21, 2012

Pay As You Earn, and Your Student Loans Disappear (Maybe)

Pay As You Earn, and Your Student Loans Disappear (Maybe)

BeckyF/Flickr source

Students taking out hefty student loans from a private institution often do not know they could have applied for federal aid instead, according to Illinois Sen. Dick Durbin. He expressed his disappointment that two out of three students don’t understand the difference between private student loans and federal loans. Under Obama’s Pay As You Earn program, there is extra incentive to get federal loans — automatic forgiveness.

In a press conference Monday, Durbin touted a bill he introduced to Congress that would require colleges, universities, trade schools and any other institution that accepts federal loans to inform students about federal aid and the difference between that and private loans. Regulating private loans could help protect graduates having trouble finding work from being crushed under the weight of their debts. (In March, Durbin also pushed legislation that would authorize debt forgiveness for private loans in the case of bankruptcy.)

Federal loans usually come with a lower rate, and now include an Obama-enhanced version of the Bush administration’s Pay As You Earn program. In support of this plan a new website launched today, acting essentially as a campaign prop geared toward current students and new graduates. It was built to showcase the new rules, set to take effect this year, and how much money you could (potentially) save under the program. A well-designed calculator shows savings based on the lifetime of your student loan under the Obama plan — and makes sure to rip on Romney-Ryan for charging you much more.

“If you qualify for the “Pay As You Earn” program, your monthly federal student loan repayment will be capped at 10% of your monthly discretionary income,” the website reads. “If you are a responsible borrower and make 20 years of on-time payments, your remaining debt will be forgiven. If you are in public service, like teaching, nursing, or serving in the military, your remaining debt will be forgiven after 10 years of on-time payments.”

In that case, take out as much student loans as you want, go to the best school you can get into, and make sure to get a job. Any job. Then you can just simply wait out the debt since it is based on your income and not your actual interest rate. If you get unlucky and receive a raise then you will be stuck paying off your debt at the original interest rate. Oh well.

It is unclear what the Obama administration is advocating with this kind of explanation. Strive for mediocrity? Don’t overachieve? Either way, dialing down the rate of payments might provide assistance for some less-fortunate graduates, but it does nothing for the state of the student loan fiasco. Perhaps we just need more affordable schooling.

Bottom line — qualifying for pay-as-you-earn and similar programs offered through the federal government can be extraordinarily complicated. It’s possible that you’ll wind up having your outstanding interest “capitalized,” which means it’s added to your loan principal, if you leave the program. Details are here. Check with an accountant before applying for any student loan or any repayment program.

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