A young friend of mine just graduated from college and, even has a brand new well-paying job! And that’s not all, he’s newly married! What a lucky guy!
What’s not lucky is that he has student loans. In just 6 months he’ll be out of his grace period and will have to start paying those loans back.
What are his options?
The first thing he might want to consider is consolidating his loans.
Let’s say his loans are all federal direct loans and that some are subsidized and some aren’t. These loans were made in different school years for different amounts and at different interest rates.
So, even though he’ll probably have his loans grouped with one servicer by his lender (the U.S. Education Department), keeping up with all those different loans requires a lot of attentiveness. Mistakes can easily be made by the borrower. Or even by the servicer…shocking, right?
Consolidate Student Loans and Stay Organized
Consolidating his loans would give my young friend a far simpler repayment picture. His interest rates would be averaged and weighted into a rate nearly the same as if he had kept them all separate. Not only that, but he would gain access to at least one of the new affordable repayment plans.
Consolidate Student Loans and Get Affordable Payments
So far, the very newest repayment plan is not quite finalized, but is nearly certain to be available in December of 2015. It’s called the Revised Pay As You Earn plan, or REPAYE for short. My friend would be eligible for REPAYE and it might keep his payments down enough for he and his wife to save for their first house, and to start a family.
He would have been eligible for REPAYE’s more borrower-friendly older cousin, the PAYE plan, IF he had not gotten that well-paying job right out of college. Thanks to his new paycheck, he will not be poor enough in comparison to his student debt to get on the PAYE plan. Moreover, the ratio of wealth to debt for my friend gets even worse under REPAYE because the fed’s calculation of HIS income will include his wife’s income as well. Who knew he should have borrowed more? Just kidding!
But, no matter! Getting your student loan payment down to 10% of your JOINT discretionary income is still a wonderful thing! And, since my friend only has undergraduate loans, any remaining balance will be forgiven after 20 years. The forgiven amount could be taxable that year as income, but it’s likely this tax threat could be gone in the future, thanks to congressional efforts.
If my friend decides to consolidate all his student loans into a single Federal Direct Student Loan for simplicity’s sake and then decides to enter the REPAYE plan, he will have to understand one important fact. As a participant in the plan, he is obligated to send in a form which verifies his family’s joint income EVERY SINGLE YEAR. If he forgets the verification form, he will be placed in an alternate version of the REPAYE plan until he is jolted awake by the higher payments!
The new REPAYE plan will allow many more borrowers to get affordable payments as well, no matter when they got their loans and no matter how much money they earn. The older borrowers will need to get some of their “non-direct” federal loans, such as FFEL, consolidated into Federal Direct Consolidation loans. The biggest thing for older borrowers to remember is that Parent Plus loans cannot be included in these new Federal Direct Consolidation loans. And, even if an earlier consolidation loan paid off a Parent Plus loan, then that consolidation loan is considered “tainted”. It cannot be included in the borrower’s new Federal Direct Consolidation loan, whose purpose it is to access the REPAYE plan.
So you might be wondering why this latest round of cleverly acronym’d student loan repayment plans has come to be a dinner party topic. Here it is: REPAYE clamps down on the excesses of PAYE. Simple as that.
People had begun to game the system. Doctors, lawyers and other high student loan borrowers figured out that they could combine the generous features of PAYE with the Public Service Loan Forgiveness program (PSLF). In 2017, the first of many lucky borrowers will have hundreds of thousands of student loan debt forgiven. The forgiven amounts will not be taxed.
All this system-gaming has given colleges the idea that they can raise their tuitions to match the benefits of the PAYE plan and PSLF program. Taxpayers will be on the hook for the ever-spiraling debt and tuition crisis at private non-profit colleges AND to some degree at public universities.
The cry has gone up to politicians and higher education policy-makers: Put the brakes on PAYE! So REPAYE was invented, and here we are on the brink of it’s implementation.
We can only hope that this time they got it right. I’m taking bets starting now! Who’s in?