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.
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.
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.
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?