Tag Archives: Income-driven repayment plans

Details of the upcoming REPAYE student Loan Repayment plan.

PAYE and REPAYE

Is this the last you’ll hear about student debt repayment? Don’t bet on it! The politicians must have their say and so shall I. Before I start my rant, please watch my video so you’ll be up to speed.

So, this new REPAYE plan will allow millions more student loan borrowers to have much lower monthly payments and get the remainder of their loan balances forgiven in a few decades. Now these poor borrowers can get on with their lives, start families and buy houses. Good for the economy, right?
Well, not so much. Actually, this REPAYE plan and all income-based repayment plans which include forgiveness, simply shift the burden of ever-more-costly higher education to the taxpayers and remove the risk from the students and institutions. So no one has any incentive to control costs or reduce borrowing. Not a good idea!

As I write this blog post, the news is awash with Hillary Clinton’s “College Compact” proposal. More burden-shifting! Even if she does get elected, I cannot see how this gets enacted. Spoiler alert: the proposal gets hacked to death by the Republican congress.

The real fix for the problem of spiraling college costs is to delink getting a degree or certificate from the need for student loans. So, just how can we do that? How about changing the delivery system. In fact, that’s already happening. The delivery system for higher education is morphing into a blend of on-line and classroom instruction. The cost for this delivery system could be far cheaper than the mess we have today. The delivery system for specific job training is also getting ready for prime time. It will be nothing like 1950’s style trade schools. Today’s jobs require students to have a solid grasp of math, science, reading and communications skills. Forward-thinking employers are already setting up schools to educate their future employees. Students will learn specific skills that allow them to transition to jobs immediately after graduation. Aspects of a broader education will be woven into the curriculum to prepare students for future managerial jobs. Or at least, that is the hoped-for outcome.
Education prognosticators say that a college education or job certification is a necessity the young person’s future, and for the future of our country. This education and training needs to be efficiently delivered and efficiently received by the students. To that end, many young people who are ready to take basic college courses as early as the beginning of high school can receive free higher education through dual enrollment. These are courses that can get students free college credits that transfer to their state’s four-year universities, making student loans much less necessary. Dual enrollment for both college courses and job certification should be free in all states. Many states are well on the way to this goal.
The student loan system should have been phased out years ago before it got out of control. But, there is big, BIG money involved, both for the government (6.7% average loan interest) and for the schools. Especially the for-profit schools. This big money is the source of the push-back against new less costly delivery systems for higher education.
With parents and students getting very worried about student loans, it’s only a matter of time before the student loan bubble deflates. New loan repayment programs like PAYE and REPAYE will continue to push the problem off onto future taxpayers. Sadly, those taxpayers could be the very students who are thinking about taking out student loans right now.
To them I say “Don’t do it…find another way! No more student loans!”.

Consolidate and Stay Cool!

Consolidate Student Loans to Stay Organized and Pay Less!

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?

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!

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