Student loan borrowers affected by the changes proposed for 2015 should still be research repayment options and choose the plan that best fits their budget.
President Barack Obama announced some big news this week that stands to help many student loan borrowers.
Most people met the president’s proposed changes with excitement, even though it seemed like many didn’t exactly understand what the changes were or, even more importantly, how the changes apply to them. So, let’s answer some big questions about the president’s executive action.
1. Will these updates help me? If you have federal student loans, maybe. With his executive action, the president expanded the existing Pay As You Earn program available to federal student loan borrowers.
Currently, this plan caps monthly payments at 10 percent of a borrower’s disposable income and forgives the balance after 20 years of payments. Those aspects of this plan won’t change.
What will change is the number of borrowers who can take advantage of this option. Currently, only newer borrowers are eligible for this plan. However, starting in 2015, borrowers who took out loans before October 2007 or stopped borrowing by October 2011 will now be eligible. Government officials estimate this number to be 5 million people.
2. How much could I save? Now, most federal loan borrowers are eligible for income-based repayment – a different repayment plan that has the same premise as Pay As You Earn.
Unlike Pay As You Earn, IBR caps payments at 15 percent of one’s disposable income and forgives the balance after 25 years of payments. Those differences could mean a lot, both in the monthly payment amount and in the total amount paid over time.
For instance, consider a borrower who owes $55,000 at a 3.41 percent interest rate, has an income of about $35,000 per year, and is not married, and has no other dependents.
The smaller payments would probably make a real difference in your budget, but note that you will pay more in total over time than you would under standard repayment. The exception would be if you worked in public service, in which case forgiveness would happen after 10 years, with a total of only $20,000 paid during that time.
So before you speed-dial your loan holder, run this calculator to see how to Pay As You Earn would affect you. If your payment amount is more than what you pay now, then you probably won’t be eligible. Even if you are, check out the projected forgiveness column in the calculator to see if at your current income you have any chance for balance forgiveness and how much.
If not, you may be better off paying your current payment amount, especially if you anticipate a salary increase over the next few years, to avoid paying all that extra interest. Keep in mind that any forgiven amount will be taxed as income. Also, remember that if you work in public service, the forgiveness occurs after 10 years of payments. In that instance, it’s not taxed.
3. Didn’t the president mention loan refinancing too? He did but in relation to a bill that Sen. Elizabeth Warren, D-Mass., introduced last month called the Bank on Students Emergency Loan Refinancing Act.
This legislation would allow federal and private student loan borrowers with older, higher-interest loans to consolidate them within the direct loan program at today’s lower fixed interest rates. That bill still has to pass both the Senate and the House, something that may not happen because Republicans are opposed to paying for the bill with a gradual increase in tax rates for those in the higher income brackets.
The president made it very clear that he fully supports this bill.
4. What else should I know? There is still a long way to go before the president’s executive action takes effect. December 2015 is the target implementation date.
The President’s overall plan includes quite a few other ideas that will make a difference to student loan borrowers, like improving financial incentives for federal student loan servicers to help borrowers stay out of default, making it easier for the active-duty military to receive benefits under the Service Members Civil Relief Act and increasing communication partnerships with entities such as the IRS and tax companies to ensure consumers are aware of their higher education rights and benefits.
We’ll update you accordingly as we learn more about these ideas.
* credit to www.usnews.com/education/blogs/student-loan-ranger/2014/06/11/4-must-know-facts-about-obamas-new-student-loan-plan