Monthly Archives: February 2015

PAYE – Pay As You Earn Student Loan Repayment Plan – Morphing yet again!

So the President is expanding and changing his favorite student loan repayment plan…Pay As You Earn…again!

PAYE, is an apt acronym for the Pay As You Earn plan. If you borrowed money from the government to attend college, you are going to PAYE, but maybe not as much as you expected.

If you are a taxpayer, you are going to PAYE for a portion of someone’s education, and maybe more than you expected.

And then there are the colleges and universities who will, as usual, plan their yearly tuition increases around the latest proposals to increase the availability of ever more liberal student loan repayment schemes. Maybe it IS time for a change.

Take a look at my video, in which I try to make PAYE more understandable!

As much as I’d like to see the PAYE plan help student borrowers, and it will, I’d also like to see if any of the proposed PAYE plan limitations will help to put the brakes on the insidious cycle of tuition creep.

For your enjoyment, I copied this right out of the Department of Education’s 2015 Proposed Budget:

The 2015 Budget proposes to extend Pay As You Earn (PAYE) to all student borrowers and reform the PAYE terms to ensure that program benefits are targeted to the neediest borrowers. The reforms also aim to safeguard the program for the future, including by protecting against institutional practices that may further increase student indebtedness. In addition, to simplify borrowers’ experience while reducing program complexity, PAYE would become the only income-driven repayment plan for borrowers who originate their first loan on or after July 1, 2015, which would allow for easier selection of a repayment plan. Students who borrowed their first loans prior to July 1, 2015, would continue to be able to select among the existing repayment plans (for plans for which they now qualify and for loans originated through their current course of study), in addition to the modified PAYE.

The Budget proposes additional changes to PAYE that include:

  • Eliminating the standard payment cap under PAYE so that high-income, high-balance borrowers pay an equitable share of their earnings as their income rises; (Listen up doctors, lawyers and dentists!)
  • Calculating payments for married borrowers filing separately on the combined household Adjusted Gross Income; (so the message is, don’t get married?)
  • Capping Public Service Loan Forgiveness (PSLF) at the aggregate loan limit for independent undergraduate students to protect against institutional practices that may further increase student indebtedness, while ensuring the program provides sufficient relief for students committed to public service; (the cap would be $57,500)
  • Establishing a 25-year forgiveness period for borrowers with balances above the aggregate loan limit for independent undergraduate students; (this is aimed at lower income borrowers who used the higher threshold PLUS loans).
  • Preventing payments made under non-income driven repayment plans from being applied toward PSLF to ensure that loan forgiveness is targeted to students with the greatest need; and
  • Capping the amount of interest that can accrue when a borrower’s monthly payment is insufficient to cover interest costs, to avoid ballooning loan balances. (Currently 10%)

If your eyes have not glazed over by all this budget stuff that really won’t take effect until early 2016, here are the contents of the “special sauce” that I mentioned in the video. The two big deals about the PAYE plan are that your monthly payments are kept low by a calculation of what 10% of your discretionary income would be according to your salary. This calculation of your payment can never be greater than what you would have paid if you had been using the Standard Repayment Plan. If the calculation shows that, in any year, your payment IS greater than the Standard plan, a loud buzzer goes off and you are OUT…yes, you are sent back to the hell of HUGE monthly payments! The message is: have a good accountant who will warn you and make sure you send in proof of your eligibility and family size each and every year. Because they will throw you out for forgetting that too!
Here’s the other big deal part of the special sauce: a 10% limit on capitalization for unpaid accrued interest! For those moderate non-doctor borrowers (60K to about 150K) that means that they will never find their loan amount ever gets bigger than 10% more than the amount they originally borrowed. There you have it. Special Sauce!

And now, having read the proposed new PAYE rules, you know why the doctors, lawyers, and dentists are going to be spitting fire at the Administration. You would too if you’d had to borrow $400,000 or more just to get through school, and then had to face a 6K a month payment for the next ten Standard Plan years

Learn about PAYE
PAYE. It’s complicated, but important!