FIVE THINGS YOU SHOULD UNDERSTAND ABOUT TAXES AND YOUR STUDENT LOANS
President Obama recently noted that higher education has been a luxurious investment in the US. It has become expensive that students who desire to have a better future are often constrained not to finish a degree while paying off the student loan incurred in the hopes of graduating college. With this in mind, the president made recommendations which can help students turn their dreams into reality sans the burden of being loaded down with huge debt.
The president recommended consolidating the different kinds of income-driven plans to one. He plans to modify Pay As You Earn (PAYE) system and make it only income-driven repayment scheme available to student borrowers. This modified scheme will become available to those who will incur their first loan on or after the 1st of July 2016.
A visit to the existing income-driven repayment scheme
Income-driven repayment plans were developed to give students a manageable means to repay the debts they incurred to support their education. Under the current system, there are three available income-driven repayment plans from which a student may choose from: income-based repayment plan (IBR plan), PAYE, and income-contingent repayment plan (ICR plan).
IBR plan can be availed of both by new and old borrowers. A student is a new borrower when he or she does not have an outstanding balance on direct loan or Federal Family Education Loan program when another loan was given on or after July 1, 2014.
For those who are not new borrowers, their payments shall consist of 15 percent of one’s discretionary income and must be paid within a 10-year plan. For new borrowers, the rate is only 10 percent within the same number of years. PAYE is similar to IBR since the rate is only at 10 percent of the borrower’s discretionary income and must be paid within 10 years.
Under the ICR plan, on the other hand, a student can repay his or her loan in an amount whichever is lesser between the 20 percent of one’s discretionary income, or what could be a fix payment adjustable depending on one’s income and the payment is within 12 years.
President Obama’s proposals to improve student loan repayment scheme
In the 2016 budget, the president intends to reform and streamline the repayment schemes available to student borrowers. He intends to ensure that the program benefits its targeted group of student borrowers the most and provide more economical higher education options.
PAYE will be expanded and provided to all student borrowers. Instead of having three schemes, PAYE will be the only income-driven repayment plan for borrowers who will sign their loans on or after July 1, 2016. Aside from this, the PAYE will have some modifications.
- Married borrowers are required to include the income of their spouse to calculate the income-driven monthly payments. Hence, they will not be allowed to file separate tax reports.
- The new PAYE scheme is more generous since it caps payments at 10 percent of discretionary income. Loan forgiveness will be available after 20 years. However, when it comes to giving benefits, the new scheme has a stricter limit. Student debts which amount to or are greater than the aggregate, independent, undergraduate limit of $57,500 would only be eligible for forgiveness after 25 years of payment.
- There will be new caps on the amount of interest that will accrue when monthly payments are found insufficient to cover the stipulated interest. This will help avoid ballooning balances of the loan.
Despite the truth that this new PAYE scheme may be stricter than current programs, the percentages are lowered. Hence, it would facilitate any student borrower in paying off their college education without worries that they will spend every penny of their salary to satisfy their debts.
Changes for the campus-based aid
Aside from PAYE, the Federal Perkins Loan Program will also undergo certain modifications. Currently, Perkins loans enjoy lower loan limits and interest rates compared to Stafford loans. There are recommendations to expand the Federal Perkins Loan project in terms of financing. From $1 billion, it will receive $8.5 billion every fiscal year. Hence, it will carry the same interest rate, terms and conditions enjoyed by Stafford loans. Moreover, it will be implemented by the U.S. Department of Education directly.
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- For those who provide public services, their loan cap will also be at $57,500.