Are the new changes to student loan repayment options as clear as mud? Let’s wipe away the muck and determine how the changes help or hurt. Hurt? Unfortunately everything that glitters ain’t gold.
In June, the president signed an executive order giving 5 million more student loan borrowers access to the PAYE (Pay As You Earn) income based repayment program. All borrowers with loans prior to October 2007 are now eligible. This program will be available beginning December 2015.
The high points include:
– Your monthly payments can be capped at 10% of discretionary income. Your loan will be restructured based on income and family size.
– Loan balances will be forgiven after 20 or 25 years of payment.
– Loan balances for employees of nonprofit organizations will be forgiven after 10 years of payments.
– All federally subsidized student loans, except the Parent Plus loans, are eligible.
– Applications are available online at StudentLoans.gov.
For borrowers with large loan balances and/or relatively low salaries, these adjustments free up much needed cash; especially with other debt to manage. To date, however, only 50,000 borrowers have taken advantage of the existing programs.
The potential drawbacks include:
– You loan term is extended because of the payment adjustments. Paying off the loan will take much longer.
– You’ll pay more interest overall because the lower payments extend the repayment term from 10 years to as much as 25.
– Any loan balances forgiven may result in taxable income for those who are NOT employed in a nonprofit organization.
Definitely take advantage of any solution that can help maximize your income. However, avoid being lulled into complacency with a lower student loan payment. Make repayment all debt, including student loans, a priority. Take on a second job, resist the urge to expand your lifestyle with high rent apartments or expensive cars, or consider moving back home until you’ve dumped your student loan debt. Keeping a loan for 20 or 25 years with the promise of a future balance forgiveness is not a good plan for your future.
Use this repayment estimator to determine your payment adjustment.