Under rules effective Tuesday, any American who borrowed directly from the federal government for college or graduate school can enroll in a program called Pay As You Earn. The program—previously open to only newer borrowers—sets the monthly payment at 10% of a borrower’s discretionary income, defined as adjusted gross income minus 150% of the federal poverty level.
Monthly payments typically drop by hundreds of dollars under the program but extend beyond the standard 10 years—to a maximum 20 years for those with undergraduate loans and 25 years for those with graduate loans. Any remaining balances at that point are forgiven.
The program, put in place by the administration in 2012, had already been available to most of the 29 million Americans with direct federal loans, and enrollment has surged. The administration initially excluded borrowers who took out loans before October 2007.
Administration officials said Tuesday that they were opening up the program to essentially all federal borrowers—excluding parents who financed their children’s educations—to stem a continued rise in defaults and streamline the federal government’s notoriously convoluted repayment options. The expanded program will cost an estimated $15.4 billion over 10 years.
But the program carries risks for borrowers. Many will see their balances grow because their new monthly payments won’t cover interest.
Also, balances forgiven after 20 or 25 years will be taxed as ordinary income, leaving many borrowers suddenly facing tax bills in the thousands of dollars. The Obama administration has proposed making forgiveness tax-exempt but needs approval from Congress.
Source: The Wall Street Journal. Read more here.