Graduate Borrowers, Consider This Student Loan Plan Before July 1

Starting July 1, the Education Department will limit enrollment in three income-driven repayment (IDR) plans, which cap monthly student loan payments at a certain portion of income and can eventually forgive remaining debt.

The most significant change: The Pay as You Earn (PAYE) plan will close all new enrollment starting July 1. If you’re already on PAYE, you’ll remain on the plan.

“Any borrower who has significant debt and thinks they're going to get forgiveness under an income-driven plan should look into whether Pay as You Earn is able to save them more money over time,” says Betsy Mayotte, president and founder of The Institute of Student Loan Advisors.

If PAYE is your route to paying the least over time, apply ASAP. As long as you submit a PAYE application before July 1, you’ll get onto the plan if your application is approved, even if that approval comes after July 1, an Education Department spokesperson told NerdWallet on June 6.

Two other IDR plans, the Income-Contingent Repayment (ICR) and the New Income-Based Repayment (New IBR), will also close to certain borrowers in July.

Here’s who should act before the deadline, what these July 1 changes could mean for you and how to prepare.

Borrowers with graduate school loans or future high incomes should consider PAYE

PAYE is a good fit for certain borrowers. Take a close look at the plan if you’re in any of these situations:

• You have graduate school debt. You can get forgiveness after 20 years of payments on PAYE if you have any graduate school loans, compared to 25 years on other popular plans, like Saving on a Valuable Education (SAVE). 

• You expect to earn a high income in the future. PAYE payments are capped at 10% of your discretionary income, but even if your earnings grow in the future, payments will never be higher than what they would be under the standard 10-year repayment plan. Most other IDR plans don’t have this payment ceiling, which can give some high-earners very large student loan bills.

• You’re eligible for PAYE. If you had no outstanding direct loan or FFEL Program loan debt as of Oct. 1, 2007, and you took out a direct loan on or after Oct. 1, 2011, you can qualify for PAYE. You also must have a partial financial hardship to get on the plan: This is generally true if your total federal student loan debt is higher than your annual discretionary income.

• You’re ineligible for New IBR. The New IBR plan is almost identical to PAYE, but it requires that you originally took out a student loan on or after July 1, 2014. 

“PAYE is really beneficial for people who might be married and make a good household income with their spouse, or people who expect high-income earning jobs in the future or who already have them and are not eligible for the New IBR plan," says Emma Crawford, a certified financial planner focused on student loans at Perk Planning, a financial planning firm based in Madison, Wisconsin.

For example, future physicians who earn less during residency but have high earning potential can be a good fit for PAYE, Crawford says.

Borrowers pursuing Public Service Loan Forgiveness (PSLF) who expect their income to increase in the future should also consider PAYE because of the monthly payment cap, says Jantz Hoffman, executive director of the Certified Student Loan Board of Standards, a nonprofit that helps financial planners and their clients make student loan decisions.

Sign up for PAYE online or through your servicer

The Education Department’s loan simulator can help you estimate your payoff journey under different repayment plans.

If you determine PAYE is your best option, start your application ASAP and submit it by June 30 at the latest. Sign up for the plan online by filling out the application on StudentAid.gov/IDR, or contact your federal student loan servicer directly.

“The easiest and fastest way to apply is on studentaid.gov using the tools there, as long as the borrower provides the linked tax return through studentaid.gov for their income documentation,” says Hoffman. “If, for some reason, their income has changed and they're providing a pay stub instead, they're better off completing a paper form and uploading that to their loan servicer.”

People currently enrolled in PAYE can stay on the plan

If you’re already enrolled in PAYE, or you apply before July 1 and are approved, you’ll be able to make payments on the PAYE plan until your loans are paid off or your debt is forgiven.

However, if you decide to switch to a different repayment plan in the future, you won’t be able to re-enroll in PAYE.

“It becomes a one-way exit,” says Mayotte.

If you believe you were wrongly denied for PAYE, Hoffman suggests submitting a student loan complaint with the Education Department’s ombudsman.

Income-Contingent Repayment will only accept parent PLUS borrowers

Starting July 1, the ICR plan will only be available to borrowers who have a direct consolidation loan containing a parent PLUS loan. The plan has a 25-year repayment term and caps payments at 20% of discretionary income, rather than 5% to 15% with other plans. As a result, ICR is not the best fit for the majority of borrowers, so this change won’t have a wide impact, Hoffman says.

However, it could be worth looking at ICR if it can give you the lowest monthly payment and you’re close to the 25-year forgiveness finish line (or 10-year finish line, for PSLF), Mayotte says. Though uncommon, ICR could give you the lowest payment if you have an income that’s very high relative to what you owe, Mayotte adds.

The New IBR plan will close to borrowers enrolled in SAVE

The New IBR plan is very similar to PAYE: It can forgive graduate debt after 20 years of payments capped at 10% of your income, compared to 25 years on other plans like SAVE. The key difference is that you must have taken out a student loan on or after July 1, 2014, to access New IBR. You can access PAYE if your loans are older than that.

Effective July 1, borrowers who spend at least 60 months (five years) on the SAVE repayment plan will be blocked from enrolling in New IBR.

This change is meant to close a loophole for borrowers with graduate loans, Mayotte says: “They're trying to make sure that people don't game the system by getting the additional benefits and lower payment of SAVE and then flip over at the last minute to New IBR to get the 20-year forgiveness.”