The Pay as You Earn (PAYE) program for student loan forgiveness was passed back in the end of 2012 but some modifications have been proposed in 2015. What will change and what will stay the same in terms of student loan forgiveness? The following guide will acquaint you with all of the novelties.
Expanded PAYE Eligibility
In 2015, President Obama has proposed some substantial change to the PAYE program. The first proposal is for extending PAYE to all student borrowers, regardless of their first loan disbursement date.
In addition, Obama has proposed PAYE limitations that will mainly be put in place to deal with some institutional practices that may eventually put students further in debt. The standard payment cap that was previously valid will be eliminated and the payments under non-income driven repayment plans will be eliminated.
According to US News data, the proposed changes will have a positive impact on nearly five million student borrowers.
The proposed changes have been met with a lot of excitement. Still, numerous questions remain and many people are uncertain about the manner in which the suggested PAYE changes will affect their finances.
The Public Service Loan Forgiveness Program
The Public Service Loan Forgiveness Program (PSLF) is another option that has been around for numerous years. It was established under the College Cost Reduction and Access Act (CCRAA) in 2007.
According to the new regulations, student loan forgiveness will take place after 10 years of payments being made rather than after 20 years, as the regulations used to state in the past. The updates will also make it much easier for students to borrow money.
The application requirements are already far from strict but with the amendments, the broad appeal of PSLF will increase even further.
PAYE is actually a program that was launched to broaden the appeal of PSLF. With both of these initiatives seeing some reform in 2015, borrowing money and having the loan forgiven after a relatively short period of time will become a viable possibility.
Who’s Going to be Affected?
Many individuals that have a federal student loan will probably be affected by the changes suggested by President Obama.
At the moment, there’s a 10 percent cap on monthly payments of the borrower’s disposable income. This aspect of the program will remain unchanged in 2015.
The number of individuals capable of using the student loan forgiveness program, however, is expected to see a serious increase in 2015. Right now, the PAYE program is only available to new borrowers. With the proposed changes, individuals that took a loan before October 2007 and the ones that stopped taking a loan by October 2011 will also become eligible for student loan forgiveness.
Taking a Look at the Numbers
So, what will the financial implications of the 2015 student loan forgiveness program be? Currently, students can choose between the PAYE plan and an income-based repayment (IBR) possibility. The two are vastly different and they will produce highly specific savings.
US News quotes an example of an individual that has borrowed 55,000 dollars at a 3.41 percent interest rate. Under the IBR repayment opportunity, that individual will have to make payments for a period of 25 years. The total amount repaid over time will reach 75,956 dollars and zero dollars will be forgiven.
Under PAYE, the total amount paid over time will be 67,232 dollars. The amount forgiven will reach 18,644 dollars. The calculations are made for an assumed annual income increase of five percent. Still, there will be restrictions for high income individuals and for the ones that have pursued a public interest career. It’s also to be determined whether individuals that have borrowed prior to the implementation of the changes will have access to the existing PAYE and IBR plans.
It’s important to know that the amount forgiven from a student loan will be considered taxable income. Doing the calculations in advance is essential for figuring out the saving amount that PAYE will contribute to and whether it’s a lucrative option.
A Few Additional Tips and Considerations
These changes are just suggested and they’ll have to pass through an official approval process. The viable implementation frame is by the end of the year (December 2015).
Apart from providing better student loan forgiveness options, the president’s initiative envisions additional financial concessions for the student borrowers. There will be specialized incentives for the providers of student loan initiatives, helping students in need of monetary assistance.
The proposed act will also focus on better communication with the IRS and taxation companies, making it easier for students to access information about available loans and other initiatives decreasing the cost of education.