The Student Loan Forgiveness Illusion

student loan forgivenessIt took a long time for the very generous forgiveness provisions included in the president’s 2010 Pay-As-You-Earn (PAYE) student loan program to finally get noticed by the general public. A full three years after launching the program, there were still only a handful of American families who knew about its existence.

It’s hard to imagine a program that allowed a $40,000-a-year social worker with a $100,000 student loan debt to pay less than $200 a month for ten years and then have the entire loan balance forgiven would go unnoticed for such a long period of time. When the program finally did get noticed, however, the loan servicing companies that contract with the government to service those loans kicked-out about 50% of the borrowers enrolled in the program causing their loan payments to sky-rocket. This is something the public still doesn’t know much about and it can mean a lot of trouble down the road.

As it turns out very few students have actually been able to benefit from an incredibly generous program that was launched over five years ago through the president’s executive order.

Why My College Planning Team Promotes the Pay-As-You-Earn Program at our workshops

My College Planning Team has always encouraged families with students who are likely to rack up a lot of student loan debt to take advantage of the government’s current Pay-As-You-Earn (PAYE) program’s generous forgiveness provisions. We don’t promote these loans because we believe they were good public policy. We promote them because it is our job to help college graduates survive in a very competitive job market where many graduates are earning little income while carrying very high student loan debt.

Large student loan debt plus a low paying job is a recipe for big financial trouble. The current Pay-As-You-Earn (PAYE) program, however, eliminates the possibility of student’s defaulting on their loans because of its generous provisions:

  • A borrower who ended up working with any 501C3 received full forgiveness on their entire loan balance after ten years.
  • Loan payments were capped at an amount equal to what the borrower would have paid under the standard ten year repayment program. This was a great benefit for borrowers whose income increased significantly over time.
  • Married borrowers had the option of only using one income if they filed their taxes separately. Accordingly, borrowers with a part time job earning less than $20,000 a year would make zero payments for ten years and still have their loan balance forgiven.

So why such limited publicity in the first two years?

I don’t think we can ever know why the original program received such tepid promotion by the Department of Education. Perhaps officials knew the program was essentially unaffordable to tax payers?

Why were 50% of the borrowers who got into the program kicked out of it?

We know from the reports of thousands of students that there has been a deliberate effort by the loan servicing companies to not make borrowers aware of their annual income certification deadline requirements. Only by meeting these requirements are borrowers allowed to continue in the program. Students who fail to meet the income certification deadlines are arbitrarily placed in the the standard ten-year program with their loan payments going up as much as 300% to 400% without recourse.

Enter the newly Revised Pay-As-You-Earn Program?

After all that, the administration now wants to strip PAYE of its most generous benefits. The administration’s revised Pay-As-You-Earn Program (REPAYE), while bringing some fiscal sanity back into the mix, has taken out three of its most generous features:

  • First of all, the newly proposed forgiveness provisions only allow ten years of forgiveness on the undergraduate portion of the total loan balance. Though the program puts a $57,000 cap on the undergraduate portion, in reality most undergraduates will only rack up about half that amount of debt.
  • The graduate school portion of the debt (the largest portion) is kept on the books with no forgiveness until after 25 years of payments.
  • To make matters worse, REPAYE removes the cap that was tied to what the student’s payment would have been under the standard ten-year program.
  • Finally, REPAYE will no longer offer married borrowers the option of filing taxes separately. They will have to report the family’s combined income.

The above changes do not really make the forgiveness provisions worth it for most borrowers. The proposed revised program would only be a shadow of its former self.

So What’s Next?

No one knows. It is expected, however, that both Republicans and Democrats want to renew the Higher Education Act (HEA) which expired in 2013. That could mean a lot of new changes in student loan forgiveness policies—for better or worse. If the Republicans win the presidency, the whole forgiveness program could be eliminated anyway.

So here’s what I’m thinking about this whole student loan mess: perhaps only God, not the Federal Government, should be in the forgiveness business! In the meantime, take advantage of the program if you are still eligible for it after graduation.

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