New Plan To Pay Off Your Student Loans

Personally, I am a big fan of paying off your student loans as quickly as possible. I know that many argue the opposite, claiming the tax deductible nature of the interest you pay, but that tax write off isn’t 100% and not everyone even qualifies for the deduction. If you are in the camp that is against paying off your student loans as quickly as possible, or you simply cannot afford the standard repayment plan on your loans, there is good news. The government has approved a new Pay As You Earn plan.

graduation from college

Comparing Plans

Before this new repayment plan came into play, there already is an income based repayment plan that many can take advantage of. If you qualify for the current plan, which is based on your income in relation to your loans, requires you to pay 15% of discretionary income towards your student loans. After 25 years, any balance still outstanding is forgiven. The new Pay As You Earn plan, lowers monthly payments to 10% of discretionary income and will forgive loans after 20 years.

Discretionary Income

Some readers might be curious as to what the official definition of discretionary income is. Discretionary income is the amount your adjusted gross income exceeds the poverty line. This calculation also takes into account family size. To calculate this, the easiest thing to do is to contact the holder of your student loan. You will need the prior years tax return as well. Assuming you qualify, the 15% would be divided by 12 to come up with your monthly payment.

Not Everyone Qualifies

Of course, not everyone will qualify for this new repayment plan. The largest group of those holding student loan debt who are ineligible are those with private loans. This new plan only applies to Federal loans. In fact, only Direct student loans (funded by the U.S. Department of Education) are eligible.

Unfortunately it gets even worse: if you have outstanding federal loans before October, 1, 2007 you are ineligible. But, even if your current loans are later than that date, you still need to have received a new loan on or after October 1, 2011. This will disqualify a vast majority of people.

Final Thoughts

If you are in the small group that actually qualifies for this repayment plan, congratulations. For everyone else, sorry for getting your hopes up. It frustrates me how technical the qualification process is. I don’t understand the point of helping out a handful of people and leaving (and getting the hopes up of) so many people to hang out to dry. This doesn’t just apply to student loans. Look at the special refinancing plans as evidence. While it does help a select few, you create so much extra work because 95% of the people don’t understand the qualifications and they get excited and start calling their note holders expecting some relief. Then they find out they don’t qualify and they are left disappointed.

Readers, what are your thoughts on the new income based student loan repayment plan?

7 Responses to New Plan To Pay Off Your Student Loans

  1. Jon says:

    I think the income based student loan repayment plan will definitely help a lot of students out but as with anything finance related there will be a lot of students who dont fully understand what they need to do to participate in it and soundbites from news papers wont be sufficient for them to make the most of it. Thanks for sharing your story I am sure it will be very helpful to people!

  2. It could have been a better news for a lot of people if there aren’t a lot of technicalities in the qualification process to go through. It will just frustrate a lot of people.

  3. Nightmare of a program in my opinion. Most of the people who are already in over their heads and have been struggling (many of my friends and peers) won’t qualify. Not to mention, I’d never encourage anyone to wait 20 years to pay off their loans. Student loans aren’t defaultable, so if you wait 20 years for the feds to discharge the balance and you for some reason don’t qualify, you’ll be in an even worse place financially.

  4. Sarah says:

    This sounds great in theory because it forgives your loans sooner and with lower payments, but graduates really shouldn’t drag their loans out over 20-25 years.

    First, you’ll pay a lot more in interest and won’t be eligible for the annual tax deduction after 60 months of repayment.

    Second, forgiveness is not free. When your loans are forgiven under either income-based repayment plan, the forgiven balance becomes taxable income. Depending on your income and how much of your loans remain at that point, you could end up owing the IRS quite a bit.

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  6. Richard says:

    You should consult a certain attorney for guidelines regarding your chosen situation.

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