Consumer Credit Counseling Service Explains the New Revised Pay As You
Earn Program
Beginning this month, student loan borrowers have a new repayment option to consider, and it could lead to significant relief for an estimated 5 million borrowers. Consumer Credit Counseling Service (CCCS) is taking steps to share important information about this new program and how it will impact those who are seeking more affordable ways to pay their debt.
“While
this new program presents exciting opportunities for student loan borrowers, it
may not be the best or only option for people to consider,” says Paul C.
Atkinson, President and CEO of CCCS “Selecting the most appropriate repayment
plan requires a clear understanding of the benefits and how those are
applicable to a person’s unique circumstances.”
The
new program, Revised Pay As You Earn (REPAYE), enables borrowers to cap their
monthly payments at 10 percent of their discretionary income regardless of when
they borrowed or how much they owe. Another benefit is that after 20 years of
making payments (25 years for graduate students), any outstanding loan balance
will be forgiven under the program. It’s similar to the current Pay As You Earn
(PAYE) option, but REPAYE is open to all students who borrowed directly from
the federal government.
What this means in
dollars and sense.
The
monthly reduction could make a substantial difference for those having trouble
making ends meet. Discretionary income for this purpose is calculated as the
difference between adjusted gross income (taken from the tax return) and 150
percent of the current poverty line. For this year, that payment would be 10%
of what is earned over $17,655 divided by 12 months. For instance, a person
earning $30,000 a year would see payments capped at a budget-friendly level of
about $102.88 a month.
Why now?
The
new REPAYE option addresses an overwhelming need to reduce student borrowers’
financial stress. That stress is blamed for the delay in home purchases and
other life-stage commitments. But of even greater concern is the upward trend
in student loan defaults. Those defaults can have a long-lasting impact on a
borrower’s financial well-being. A record of late or missed loan payments
impacts a borrower’s credit history by making any new loan requests—for cars or
homes—more expensive or just extremely difficult to qualify for.
There is a downside.
The
downside to this type of repayment option is that, for some borrowers, the
monthly payment may not cover both interest and principal payments, which means
the balance due could keep growing. That makes it harder to obtain other
personal credit—from credit cards to mortgages—because the borrower’s credit
capacity is exhausted. Another risk is
that the lower monthly payment under REPAYE will lead the borrower to pay
substantially more over the life of the loan when compared to a Standard
Repayment plan.
The
loan forgiveness aspect of the program can also trigger a one-time spike in
taxes due. When a balance is forgiven, the amount may be taxed as ordinary
income, which can cause an unwelcome boost to a future tax bill. The tax aspect
is something the Obama administration is currently working on. A proposal is
being prepared to make forgiven student loan balances tax free. It will require
congressional approval before it can take effect.
With
the addition of REPAYE to the federal loan repayment lineup, borrowers now have
eight income-based programs to choose from. Because borrowers may be eligible for more than one program combined with
the interaction between student loans and other forms of debt, they are
encouraged to reach out to an NFCC® Certified Student Loan Counselor with Consumer
Credit Counseling Service to determine which one would be the most
beneficial for their individual circumstances. To get started, consumers
can visit
www.consumercreditbuffalo.org
or call 712-2060.
