Recently, President Obama signed an executive action to provide relief for student loan borrowers. You probably have a student loan or you would have no reason to read any more of this blog. So, how do these new regulations affect you? Let me help clarify it.
What President Obama signed is an executive action and not a congressional bill. It’s a small detail but a very important one. Executive actions do not require the approval of Congress, and are used to further define and execute the duties the President assigned. This means that, at any time, these actions can be revoked. When the President leaves office his successor can also use executive orders to revoke any preceding executive action.
Here are additional details that don’t affect student loan repayment or interest rates. Under this action, President Obama directed the Department of Education to work with tax providers, like H&R Block, to better inform borrowers of available tax benefits. EducationQuest outlines many of them on our website. He also directed the Department of Education to work with Intuit, the company behind Mint.com, to communicate to borrowers about the repayment options.
There are two ways that President Obama’s actions affect current borrowers.
- It extends the Pay as You Earn (PAYE) program to include students who borrowed prior to 2007. The PAYE program caps student loan payments to 10% of discretionary income. This is based on a sliding scale, so your payment will change as income changes. After 20 years, 10 years for those in public service jobs, the remaining debt is forgiven.
- The Servicemember Civil Relief Act in 2003 capped interest rates at 6% for eligible servicemembers. This was handled manually, loan servicers had to verify eligibility by checking with a Department of Defense database. This process will now be done automatically and will require no additional paperwork.
President Obama set a goal for all of these changes to be enacted by December of 2015.
If borrowing a student loan is in your future here are some things to consider.
- Under the PAYE plan, to be eligible for loan forgiveness at the end of your payment term you must have paid in full and on time every month. That’s 240 consecutive payments.
- It is still your loan and it is debt, don’t let anyone tell you otherwise. Don’t be fooled or confused about this. If something changes or if you miss payments it is your responsibility and it cannot easily be dismissed. Unlike other loans, student loans are rarely dismissed in bankruptcy court. If you go to buy a house or car it will be on your credit report.
- It may not end up being as great as you think. If you think that your $30,000 student loan will magically disappear you need to reread this blog. Then run a repayment calculator like this one. It is possible that the PAYE program will cost you more in the long run than the standard payment plan.
- What is your total cost? Because of interest, taking out student loans will increase the cost of your degree. Likewise, extending the repayment of the loans will increase the cost of the loans. Yes, it lowers your monthly payment, but you are also paying it for 20 years!
- Assuming you qualify and make all of your payments on time, you are not done with the cost. The forgiven balance could be taxable! Which means that when you file taxes the following year it will look like your income was that much higher, and you will need to cover the extra taxes.
There are a lot of things to consider when evaluating repayment plans. Contact your servicer to discuss your repayment options. If you don’t know who your servicer is you can log onto NSLDS.ed.gov.