It appears that the Republican Party has taken over the Senate, and Republicans were elected or re-elected to several key state governorships. What does this mean for students and student loan borrowers? Here are some key things to think about:
When people talk to me about my student loan law practice, most will assume that my clients are all struggling 20-somethings with overwhelming loads of student loan debt. People are always surprised when I tell them that I actually have many clients who are parents struggling with the debts that they incurred to pay for their child’s education. It is natural and understandable that parents want to pay for their kids’ educations. But many do not realize the dangers of parent debt until it’s too late.
The most common type of parent loan is a Parent PLUS loan. A Parent PLUS loan is a federal loan taken on entirely by the parent; the student has no legal responsibility, only the parent. Over $10 billion in Parent PLUS loans are disbursed every year. And they are some of the worst student loans out there. Here’s why:
- Parent PLUS loans have very high interest rates, the highest among any type of federal student loan. Right now, interest rates for Parent PLUS loans are 7.21%. However, it is common for loans disbursed in prior years to have interest rates in excess of 8%, and under current law, they may rise as high as 10.5% in the coming years. That’s $1,050 in interest per year for every $10,000 disbursement.
- Parent PLUS loans incur origination fees, which can be over 4% of the disbursed loan balance. Combined with the high interest rate, this makes PLUS loans exceptionally expensive.
- Parent PLUS loans are not eligible for income-driven repayment, such as Income-Based Repayment (IBR) or Pay-As-You-Earn (PAYE). This is particularly problematic for parents who take out large Parent PLUS loans and intend to retire in the relatively near future. That may no longer be possible with huge monthly loan bills. (Parent PLUS loans can be repaid under Income-Contingent Repayment (ICR), an older and less-favorable income-driven option, under certain circumstances, but this can still be tough for many parents).
- Parent PLUS loans are federal student loans, which means they are subject to the draconian collection powers of the federal government if the loan goes into default. This includes wage garnishment, tax refund interception, and, if the parent is disabled or retired, the offset of Social Security benefits. There is no statute of limitations on the collection of this type of debt, meaning it will follow the parent to the grave.
So if you are a parent and you want to help pay for your child’s college education, it’s advisable to do this through a long-term savings plan. Relying on Parent PLUS loans may be a decision you live to regret.
Got Sallie Mae student loans? Read on.
I blogged about this when this was first announced, but it is a good time to remind everyone that Sallie Mae has split into two companies: Sallie Mae and Navient. This fall, Sallie Mae will be transferring the servicing and billing operations of federal student loans and certain private student loans to Navient. So if you have been dealing with Sallie Mae, you will likely soon be dealing with Navient instead.
This is not quite the same thing as one company selling your loans to another company. Rather, the servicing arm of Sallie Mae is branching off, becoming a separate company, and changing its name to Navient. Nevertheless, changes to student loan servicing can be a confusing and scary process if it comes as a surprise.
If you have student loans through Sallie Mae, what does this mean for you?
- You should receive an email or letter from Sallie Mae notifying you of any changes. If you do not receive an email or letter, you should contact Sallie Mae directly to confirm that your loans will be through Navient.
- Sallie Mae says that if you are enrolled in auto-debit, your payments should continue to be automatically withdrawn from your bank account. If I were you, I would monitor your bank account to make sure this is actually the case. If a payment is not withdrawn, contact Sallie Mae or Navient.
- If you make your payments manually each month via a check, Sallie Mae requests that you change the payee to Navient, but all other information can stay the same. Before making any changes to your billing practices, I suggest you contact Sallie Mae/Navient to confirm the details.
- Online payments will be made to Navient (not Sallie Mae) via Navient.com.
Want more information from Sallie Mae directly? Visit SallieMae.com/future, or contact the company by phone.
With the recent news about the Obama administration’s proposed expansion of the Pay-As-You-Earn repayment program for certain federal student loan borrowers, people have been talking a lot about income-driven repayment. The problem is that there are a lot of misconceptions about these repayment programs, and this can steer public discourse in the wrong direction. I’d like to try to dispel some of the most common myths I encounter.
- Borrowers pay little or nothing on an income-driven plan. There are several income-driven repayment plans, each with their own eligibility criteria and formulas to calculate monthly payments. Two of the plans, Income-Based Repayment (IBR) and Pay-As-You-Earn (PAYE) have exemptions for people at or below 150% of the federal poverty limit. This makes sense, since if it’s a choice between putting food on the table and paying your student loans, we want you to put food on the table. For everyone else, 15% of discretionary income for IBR and 10% of discretionary income for PAYE is not an insignificant payment amount, particularly given the rising cost of food, fuel, and housing, as well as declining purchasing power. Under IBR, a borrower making $35,000 per year will pay about $230 per month. At $55,000 per year, the borrower will pay about $480 per month.
- Everyone will get their loans forgiven. For all of the income-driven repayment plans, if you make payments for the full repayment term (25 years for IBR, 20 years for PAYE), any remaining balance will be forgiven at the end of the term. However, the fact is that the vast majority of people in these programs will repay their loans before the repayment term ends, and there will be no balance to forgive. Take the following example. A borrower who graduates with $33,000 in federal student loan debt (the average debt load for the Class of 2014) at a 4.8% interest rate, and has a starting salary of $35,000, will repay their loans in full under both the IBR and PAYE plans.
- It’s easy. All you have to do is send in documentation of income every year, and your loan servicer will recalculate your payment. Piece of cake, right? Wrong. The federal student loan servicing system is plagued by administrative errors and inefficiency. Many of you recall that when I tried to re-certify my income to remain in income-driven repayment, I had tremendous difficulties. And I’m the expert when it comes to this stuff!
- Borrowers get a free pass, and taxpayers foot the bill. Most borrowers will repay their student loan debts in full by the end of their income-driven repayment terms, so only a fraction of borrowers on income-driven plans will have any balance forgiven. Furthermore, because of how interest works, the vast majority of borrowers will wind up repaying significantly more than they originally borrowed, including those who get some of their balance forgiven at the end of their repayment term. On top of this, any forgiven balance could be treated as taxable income for the borrower, meaning the borrower would have to pay additional taxes. What all of this means is that under these plans, even with their forgiveness provisions, the government (and the taxpayer) still come out on top. It’s not even close. This is not a free pass for borrowers.
- Students borrow more because of these plans. There is no actual data to back up this assumption. The fact is, with college tuition exploding during the past twenty years, education has simply become much more expensive. Students entering college and taking on student loan debt have very little counseling about their post-graduation repayment options, and most do not even know about income-driven repayment until they graduate. Data shows that these programs are significantly under-utilized, meaning that borrowers who could be eligible for IBR or PAYE are simply not enrolling because they do not know that they exist.
Yesterday, President Obama signed an Executive Order expanding the “Pay-As-You-Earn” (PAYE) repayment plan option for federal student loan borrowers. PAYE is essentially a more-affordable version of the “Income-Based Repayment” (IBR) plan.
So what does this mean, exactly, and how will you be potentially impacted? These are some of the most common questions I’ve been getting:
What is IBR? In 2007, Congress and President Bush passed a law that created the Income-Based Repayment (IBR) program, which allows federal student loan borrowers to make payments on their federal student loans based on their income. The program caps monthly payments at 15% of a borrower’s discretionary income. After 25 years of payments under the IBR program, whatever balance remains is forgiven.
How is PAYE better than IBR? PAYE improves upon IBR by capping payments at 10% of a borrower’s discretionary income. To illustrate, a single borrower with $40,000 in eligible federal student loans with an income of $35,000 per year would have a monthly IBR payment of $220. Under PAYE, the monthly payment for the same borrower would be $145. Furthermore, under the PAYE program, a borrower’s remaining loan balance is forgiven after only 20 years, instead of 25 years under IBR.
So why not choose the PAYE plan now instead of IBR? When the PAYE program was created in 2012, the U.S. Dept. of Education limited the program’s eligibility to what it calls “new borrowers.” These are borrowers who had no outstanding federal student loan debt as of Oct. 1, 2007, and also took out a new federal student loan on or after Oct. 1, 2011. This locked out borrowers who had older loans.
And what does the President’s Executive Order do? The President’s Executive Order eliminates the “new borrower” eligibility restrictions on the PAYE program, meaning that borrower who took out loans prior to Oct 1., 2007, or did not take out a new federal loan after Oct. 1, 2011, will now be eligible.
Great! Where do I sign up? Not so fast. The program will not become effective until at least December 2015. The U.S. Dept. of Education has to issue new regulations governing the expanded PAYE program, and that is a long process.
Will this impact Public Service Loan Forgiveness? Public Service Loan Forgiveness (PSLF) is a separate federal loan forgiveness program whereby borrowers can get their remaining loan balance forgiven after 10 years of qualifying payments under the IBR or PAYE plans. Many borrowers were concerned after the President’s budget proposal offered a new “PAYE” plan that capped loan forgiveness at the 10-year point, and extended the repayment term of higher-debt borrowers to a 20-year term. The President’s Executive Order that he signed this week does not implement any of the proposed changes to loan forgiveness that were contained in his budget proposal, and the White House’s fact sheet on the Executive Order specifically mentions that “any remaining balance” under the expanded PAYE program is forgiven after 10 years of qualifying public service employment. Of course, additional changes to these programs could come in the future. But for now, this Executive Order does not impact the PSLF program.
Stay tuned as more information on this becomes available.
In a move that could benefit millions of federal student loan borrowers, President Obama will be issuing an executive order to reduce monthly payments under current income-driven repayment programs.
In 2007, Congress and President Bush passed a law that created the Income-Based Repayment (IBR) program, which allows federal student loan borrowers to make payments on their federal student loans based on their income. The program caps monthly payments at 15% of a borrower’s discretionary income. After 25 years of payments under the IBR program, whatever balance remains is forgiven.
Last year, President Obama created the Pay-As-You-Earn (PAYE) repayment program. This program improves upon IBR by capping payments at 10% of a borrower’s discretionary income. Furthermore, a borrower’s remaining loan balance is forgiven after only 20 years, instead of 25 years. PAYE is a significant improvement over IBR in terms of the repayment and forgiveness terms, but unfortunately, the U.S. Dept. of Education limited the program’s eligibility to what it calls “new borrowers.” These are borrowers who had no outstanding federal student loan debt as of Oct. 1, 2007, and also took out a new federal student loan on or after Oct. 1, 2011.
This week, President Obama announced that through executive order, he will be expanding the PAYE program to an additional 5 million borrowers. I’ve been advocating for an expansion of this program for years. This will have real, measurable impacts for people by significantly reducing their monthly payments and shortening their repayment term. It is unclear, however, who these 5 million borrowers will be, since there are approximately 30 million borrowers in the Direct Loan program.
Will you be eligible for the expanded PAYE program? Who is going to be left out of this executive action? Stay tuned, I’ll be posting new information about this as it becomes available.
This week, the National Consumer Law Center (NCLC), a consumer rights policy and legal advocacy organization based right here in Boston, announced that it is suing the U.S. Dept. of Education under the Freedom of Information Act (FOIA) for its secretive debt collection practices.
By way of background, the Dept. of Education contracts over 20 private collections agencies to collect on its defaulted federal student loans. Taxpayers foot the bill for these collections contracts, which cost over $1 billion in 2011 alone. The Dept. of Education projects that these costs may eclipse $2 billion by 2016. There is widespread agreement that many of these debt collection agencies routinely misrepresent student loan law and violate consumer protection statutes. Nevertheless, this federally subsidized debt collection business is booming, and contracts are routinely renewed by the Department despite widespread abuses.
NCLC stated that they have tried for over a year to obtain information under FOIA on secret contracts between the Dept. of Education and individual debt collection agencies in order to obtain details on Department oversight of the industry, and financial incentives that are provided to the companies. The Dept. of Education failed to fully comply with NCLC’s request, so NCLC filed suit in federal district court.
It will certainly be interesting to see how this turns out. The contract details between the Dept. of Education and debt collectors would shine a huge light on how these operations actually work, and could provide a foundation for reform.
The Republican-controlled House of Representatives recently came out with a tax reform plan that slams student borrowers with additional tax burdens. There are three main elements to the proposal that would directly impact student borrowers:
- Elimination of tax deduction for student loan payments. Under current law, borrowers who are making payments on their student loans can deduct up to $2,500.00 in interest payments per year on their tax return. This modest tax benefit gradually phases out for higher income earners. The House proposal would eliminate this tax deduction entirely, which would effectively raise taxes on low-and-middle income earners who are making payments on their student loans.
- Elimination of tax deduction for tuition payments. Under current law, students or their parents can deduct certain tuition-related expenses on their tax return, thus reducing their tax burden. This is a modest but helpful deduction for people that can lower the cost of education and reduce the need to borrow student loans. The House proposal would eliminate this tax deduction.
- Imposition of taxes on Public Service Loan Forgiveness. Under current law, loans forgiven pursuant to the forgiveness provisions of Income-Based Repayment (IBR), Income-Contingent Repayment (ICR), and Pay-As-You-Earn (PAYE) would likely be treated as “taxable income,” which could impose a tax burden on student borrowers. Advocates and policy makers, including the Obama administration, are working to change this so that the forgiven balances are not taxable. In contrast under current law, loans forgiven pursuant to the Public Service Loan Forgiveness (PSLF) program would not be subject to a tax burden; thus PSLF offers tax-free loan forgiveness. The House tax plan eliminates this exception. Under the House proposal, any federal loans forgiven after 2014 would be treated as taxable income. This would impose a huge tax burden on borrowers who elected to get on the PSLF track based on the promise of full loan forgiveness.
It is astounding to me that during a time where there is near-universal agreement that our student lending system is broken, and that student debt has become a huge burden on our economy, that we are talking about imposing additional financial burdens on student borrowers. The tax reforms outlined above would have measurable and, in some cases, devastating impacts on people, and this is significantly more troubling to me than the proposed reforms recently announced by the Obama administration.
As with the Obama administration proposal, however, even this draconian plan from the House is unlikely to make it into law anytime soon, given our divided government. However, this is a warning bell for all student borrowers: changes may be coming, and you must stay informed and make your voice heard.
I’ve been getting a lot of inquiries about possible changes to federal repayment and forgiveness programs proposed by the Obama administration recently. There’s a lot of panic out there. I’ve put together a concise, straightforward summary of the proposals and my own thoughts on it. I hope this will reduce some of the fear and misinformation that’s been circulating.
First, some background. As part of the budget proposal for the 2015 fiscal year, the Obama administration has proposed various reforms to federal student loan repayment and forgiveness programs. Before we even get into the details, let me point out a few important things:
- This is a budget proposal. This is not a bill or a piece of legislation, this is not a court decision, this is not an executive order. In other words, this has no force of law. It is simply a proposal, a starting point, a recommendation.
- This is a budget proposal during an election year with a divided government. This means that, practically speaking, the final product will probably be significantly different. Who knows what the final budget will even look like? I certainly don’t.
- The entire budget process is incredibly slow and tedious. Whatever the final product is, we may not even see it for a year or two, or longer.
- Any substantial material changes to federal student loan programs will require an act of Congress, signed by the President. We are nowhere near that point.
So, with all that being said, let’s get into the details. This specific proposal actually has two very good elements to it, which I think we can all get on board with:
It’s that time of year. Whether you are proactive and you already have your tax forms organized and ready to go (that’s me, don’t hate), or you’re a procrastinator and you’re just going to wait until the second week of April to even think about this stuff, tax time is looming. It’s a good time to remind everyone that your student loans can have an impact on your taxes, and your taxes can have an impact on your student loans. Here’s how:
- Tax-Deductible Interest. Student loan interest that you paid during the tax year may be deductible on your return. In other words, you might be able to lower your tax bill (or increase your refund) if you made qualifying student loan payments. The amount that you can deduct is capped, and the deduction is phased out for higher income earners, so be sure to talk to your accountant to see if you’re eligible.
- Adjusted Gross Income (“AGI”) and Income-Based Repayment (IBR). The most common way to have a monthly student loan payment calculated under the IBR program for federal student loans is to review the “Adjusted Gross Income” figure on your tax return. This is NOT the same thing as your annual salary. It is, by definition, “adjusted” and takes into account various pre-tax deductions, such as certain retirement contributions, qualifying business expenses, certain health care expenses, and other deductions. Thus for many borrowers, using the “AGI” from their tax return will result in a lower monthly IBR payment than using a paystub, which just shows gross income. Talk to your student loan attorney (I know a guy) and your accountant to determine how this may impact you.
- Joint Tax Returns. If you’re married, and one or both of you have federal student loan, you may want to think about how you file your tax return. Under the Income-Contingent Repayment (ICR) plan, your federal loan servicer will consider your joint income with your spouse, regardless of how you file your taxes. However, under the Income-Based Repayment (IBR) and Pay As You Earn (PAYE) plans, your federal loan servicer will consider your spouse’s income ONLY if you file joint tax returns. Thus for some married couples, it may make sense to file separately in order to obtain savings on your monthly student loan payments. However, you might also pay higher taxes if you file separately, so there is no one-size-fits-all solution here. Again, talk to your student loan attorney (seriously, I really do know a guy) and your accountant to determine how this may impact you.
- Claiming Dependents. Under any of the income-driven repayment plans (ICR, IBR, PAYE), your loan servicer will factor in your family size. Thus claiming dependents on your tax return may lower your monthly student loan payments a bit.
- Are you in default on federal student loans? If so, you may have been referred to the Treasury Offset program, which allows the IRS to seize any tax refund that is due to you and involuntarily apply it to your student loan debt. Many people are shocked that this happens, but it is the most common way that the government uses its power to involuntarily collect from defaulted borrowers. It’s a major incentive to resolve your federal loan defaults.
- Did you settle a student loan debt last year? If so, you may be issued a Form 1099c from your lender, requiring you to report any portion of the loan balance that was waived after the settlement as taxable income on your return. You may have to pay a tax on that, but your accountant or tax advisor can help you figure out what you have to do.
As I tell all my readers and all my clients, I am not a tax advisor, so please seek the assistance and expertise from a professional tax expert, such as a Certified Public Accountant. I’m simply letting you all know about what you should be thinking about as you start gathering your willpower to do your taxes this year. Good luck!