Federal student loans are some of the most forgiving and debtor-friendly loans that you are likely to come across. In spite (or arguably because) of this, student loan repayment has declined considerably over the years. In an effort to combat the problem, the Federal government has instituted plans to make repayment even easier.
Student Loan Forgiveness Program PAYE
In an attempt to curtail the rise of borrowers failing to repay their loans, the Federal Government created student loan forgiveness programs to aid and incentivize borrowers to make the payments they could. Pay As You Earn or PAYE is one of those relatively recent programs that went into effect in December of 2012. For those who qualify, PAYE offers low repayment plans with a cap at 10% of discretionary income. To qualify, the borrower must be facing “financial hardship”, though once you’ve qualified you can stay on the plan even if your circumstances improve. After 20 years of payments, you may qualify to have any remaining balance forgiven. Some may even qualify for forgiveness in as few as 10 years. The amount forgiven will be taxed, but it’s better than paying the remaining balance itself.
Despite these steps in the right direction, in the admittedly few years since the implementation of PAYE, borrowers are still not paying back their loans. In 2016, around 42% of graduates with federal student loans are either in deferment, late on payments, or just not making payments altogether.
New Student Loan Forgiveness Program REPAYE
As dismal as a 42% non-repayment rate might seem, it’s actually a marginal improvement from the previous year. This incremental improvement has been credited to plans such as PAYE. Hoping to double down and build upon its success, President Obama has created an executive order extending the benefits of PAYE even further. The Revised Pay As You Earn plan or REPAYE is the new student loan forgiveness plan that offers these revisions from PAYE:
- While PAYE has a series of qualifications the borrower must meet, chief among them being the time restrictions on when the loans were taken out and the hardship requirements, REPAYE is available to all graduates with Federal Direct loans.
- If you have any Federal Loans from Grad school, all of your loans will be forgiven in 25 years.
- With PAYE, the government covers accruing interest for 3 years on subsidized loans. REPAYE adds to this coverage by taking care of half of the interest after those 3 years regardless of whether the loan is subsidized or not.
There is an added benefit to the subsidized interest under the REPAYE plan. Most low monthly payment plans end up only paying down interest that keeps accumulating so that even if the balance is forgiven down the line, the balance forgiven is higher and thus the taxes are higher. With REPAYE you are paying less interest and are able to actually chip away at the principal lowering your balance so that when it is eventually forgiven you will owe less in taxes.
Currently, REPAYE and PAYE exist simultaneously with a few other income based repayment plans. While variety may be the spice of life, in this instance all it does is make an already complicated subject all the more so. If helping graduates is the intention, a single streamlined repayment plan offering the best of all the other plans seems like it would be the simplest and most beneficial option.
It is supremely important that re-certification deadlines are not missed. In order to stay on any of these plans you have to re-certify each year. Should you miss the deadline, your monthly payments won’t be based on your income and will likely increase. Moreover, losing the relief from a program in which the interest is subsidized can be a devastating blow. Deadlines are an important aspect of the entire college financing process and this is no exception; stay on top of them.
Another major concern is the politics of the situation. While PAYE and the other income based repayment and loan forgiveness plans are currently law, REPAYE is an executive order from the President. Repealing a law is a fairly strenuous process, but this is not so for an executive order. Theoretically, the next administration could do away with REPAYE with just the stroke of a pen. This is an election year and the policies of this administration may not survive the next one. With that said, the likelihood of that happening in this instance is fairly low.
As it stands, there are choices to be made when it comes to deciding which new loan forgiveness plan is best suited for your Federal Student Loans. Selecting the right one is often not as easy as it may seem. It’s never a bad decision to seek help in making the right decision. Financial advisors at My College Planning Team can help you select the plan that works best for you and your child. Click here to schedule a complimentary consultation with our team.