Student loan debt and its relationship to the successful recovery of the housing market has long been a hot topic in the real estate community. For millennials—the next generation of homebuyers—confusion over money is majorly effecting their natural financial trajectory, delaying milestones including marriage and applying for a mortgage.
However, help could be on the way, according to a new Pay as You Earn program that can have a large impact on borrower repayment choices. This option could lead to significant relief for an estimated 5 million borrowers, possibly increasing the likelihood of them becoming a homeowner in the near future.
The National Foundation for Credit Counseling® (NFCC®) 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.
“Just because a new program is announced, it doesn’t mean that it is going to be a perfect fit for every borrower,” says Bruce McClary, spokesman for the NFCC. “It takes a clear understanding of the benefits available through each option 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 percent 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.
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 to determine which one would be the most beneficial for their individual circumstances.
For more information, visit www.studentloanhelp.org.
Zoe Eisenberg, RISMedia senior news editor, contributed to this report.