Yesterday, we talked about Pay As You Earn 2014, President Barack Obama's expansion of an income-based repayment system for student loans to pretty much any borrowers whatsoever. On the surface, it looks great: ten-years to forgiveness for public sector, twenty for private (compared to traditional IBR's 15/25), plus payments are limited to ten percent of your discretionary income.
Basically, you won't go broke under PAYE 2014 while making payments, and you won't make payments forever. So why are we still holding our breath?
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Might be limited to $57,500 in forgiveness.
Back in March, when similar whisperings were afoot, the rumor was that PAYE forgiveness would be limited to $57,500, in large part to disincentivize irresponsible borrowing. (Here's looking at you, law students!) There was no mention of a limit earlier this week, though.
This doesn't cut costs.
You know what happens when you allow virtually unlimited borrowing, with the idea that you'll never have to pay all of it back? Students borrow without caution. Schools take the money and spend like drunken sailors, while continuing to increase tuition. And many, many years down the line, the taxpayers pay for it.
What about private loans?
PAYE, like all existing student loan forgiveness programs, completely ignores the massive private student loan industry. These bank-to-lender loans, unlike federal loans, are not federally backed, are not eligible for federal repayment and consolidation programs, yet are protected from bankruptcy -- you'll pay every cent of the loan, plus interest, unless you die. Legislation currently pending in Congress might help, but it's not worth discussing because it almost certainly won't pass.
Might not be tax free.
The year is 2030. After 20 years of student loan payments, you're finally forgiven. Except, the forgiveness is taxable. Yeah, that just happened, if the treasury department regulations don't differ from the current system. At present, only public interest PAYE forgiveness (the ten-year folks) get tax relief. Private sector folks get ten extra years of payments and taxation.
Memo only orders somebody to make some regulations about something.
It's an executive order to the Treasury and Education Departments, telling them to try really hard to draft and put into effect new regulations before December 31, 2015 (the day President Obama leaves office). There are no specifics to the order, other than rethinking the date restriction. And if the regulations don't arrive in time, and the next president doesn't agree with PAYE 2014 (or '15 or '16), this "reform" may not even happen.
Final Grade (Incomplete)
You can't grade something you haven't seen, and since the memorandum doesn't provide specifics about lifetime borrowing limits, interest rates, or taxation of forgiven debt, it's hard to pass judgment. The truth is, the vagueness and far off deadline might indicate that this is simply a move to push Congress towards passing their own reforms. In fact, that bill that we mentioned earlier, the one that won't pass? President Obama specifically endorsed it on Monday as well.
- New U.S. student loan program leaves many out in the cold (Reuters)
- For Student Borrowers, Relief Now May Mean a Big Tax Bill Later (New York Times)
- Want to Discharge Student Loan Debt? Fail Bar, Wait 10 Years (FindLaw's Greedy Associates Blog)