For those who are currently pursuing a degree and those who are going to be attending college or university for the first time this year, understanding the payback information regarding their student loans is important. These rules have just recently been changed yet again and it’s crucial that you understand what President Obama has in mind for loan forgiveness in the current year. It’s not going to be exactly the same as it has been in years past. It also will affect those who are simply paying their student loan and don’t qualify for forgiveness. If you still need to apply for a loan you can do so here.
Keep in mind however that this is related only to students under the PAYE plan or income based payments and that it is currently only a proposal. The new budget has not been approved yet and only when it has been will this go into effect.
Options for Payment
Currently there are several different payment options for students with loan debt. Two of these options are to pay back the loan over ten years with equal sized monthly payments or to pay monthly a portion equal to 10% of your income until the loan is paid. With the new rules initiated by President Obama this rule has changed. Individual students are no longer able to make this decision themselves and must instead pay the higher of the two rates. If you are currently paying a loan and your payment is equal to less than 10% of your current monthly income you will be required to begin paying 10% of your income each month instead of your current payment plan. This can be difficult for those who may not earn the same amount every month out of the year.
If you are married this is going to be yet another blow to your repayment as your income will be considered jointly when figuring out the 10% option for paying in. If your spouse makes more money than you do this could mean you have to pay in a higher amount. For example, if you make $800 a month but your spouse makes $1,600 then 10% of your income would be $240. If you only owe a small amount (or relatively small amount) your payments may be only a small portion of that. Under the new rule you will be required to pay the higher amount however and this may be difficult with other bills you may have.
Waives Forgiveness on High Debt
If you currently owe a large amount of money (in excess of $100,000) you will still be required to pay a portion of this debt even after the 10 year payment period ends. As the law stood previously, if you did not make enough money to pay back your loans during a ten year period your loans would be forgiven. With the new laws however, if you owe $100,000 or more your payments will be waived for the ten years as before. You will still be required to pay a portion of this loan however after that ten years. You would (in this example of $100,000 of debt) still owe $42,500 in debt which would need to be paid at a 10% of income rate over the next 10 to 15 years.
Discovery of Eligibility
If you are eligible for one of the forgiveness programs such as PSLF you will want to find it out immediately. If you make any payments under a traditional plan that is not part of PAYE you will not get credit towards a PSLF program. This means you must find out immediately (before you make a single payment) what you are qualified for and if you can get a PSLF waiver. This will keep you from making any unnecessary payments and doling out money you aren’t required to for your loans. You never want to pay more than you have to after all.
If you are already have a student loan you may be thinking that none of this applies to you. Well there you would be wrong because it actually can apply to you. The difference is that you have to opt in for this program whereas new borrowers are automatically in the program. With some of the negatives associated with the new plan you may not think that you’ll be interested in opting in but there are a few benefits to it as well.
Benefit #1: Limited Negative Amortization
If you do not qualify for paying 10% of your income then your payments may not cover the entire amount of interest accrued for the month. For example, if you are below the poverty line by 150% you will not be able to make a typical monthly payment. This means that you may be able to pay the principal but not the interest of the loan. If, for example, your interest on a monthly payment were $10 you would normally have $10 per month added on to the end of your loan payment. Under the new rules you will have only $5 (50% of the total interest per month) added on to the end of your balance.
Benefit #2: Debt Forgiveness Instead of Cancellation
Under the old rules even if your debt were cancelled out at the end of the 20 year period because you could not pay you would still be required to pay taxes on that amount at the end of the year. Under the new rules you are no longer required to do so. The loan is considered entirely forgiven rather than merely cancelled and no taxes are due. For more information on loan forgiveness you can check out this article.
There are a number of changes that will go into effect for the 2015 year if the president’s budget proposal is adopted. Keep in mind also that this is a budget proposal at this time and needs to be approved before it will actually be in effect. It is something to consider and to understand fully however as you will want to be prepared if and when it does come to fruition for you. Check out even more right here.