Welcome to the new week everyone!
I’m always pretty excited about student loan personal finance, but am especially hyped this week thanks to a couple federal proposals that have a pretty good chance of seeing the light of day.
One would expand the existing Pay As You Earn repayment program that has been very useful, but only to the very narrow group it had been available to.
The other — an as yet unnamed bill which may be similar to the Bank on Students Emergency Loan Refinancing Act — would upend what had long been one of the defining factors of federal student loans.
Expanding “Pay As You Earn”
Enacted in 2010, the Pay As You Earn student loan repayment plan caps a borrower’s monthly payment at 10% of their discretionary income, and forgives their remaining balance after 20 years.
It’s obvious why this would be good for borrowers who have landed on hard times; it’s much easier to keep paying student loan payments after a drop in income when those payments are proportional to your income rather than some nominal amount.
But capping your monthly payment is a good idea even if you’re trying to pay down your student loans as quickly as possible because it lets you focus more of your payments toward your higher-rate student loans where they’ll make the biggest impact.
So if Pay As You Earn is so great for both of these groups, why does it need reform?
Because currently, you’re only eligible for the program if you meet BOTH of these two criteria:
- You had not yet taken out any student loans BEFORE October 2007 AND
- You took out student loans AFTER October 2011.
The cloud that accompanies the silver lining is that, according to New York Times sources/speculation, it wouldn’t go into effect until December 2015 to give the Department of Education time to get everything in order.
More to follow as this develops, of course.
Allowing federal student loans to be refinanced
Meanwhile, on the legislative side, a bill sponsored by Senator Elizabeth Warren of Massachusetts would allow student loan borrowers to refinance at lower interest rates, and has been put on the Senate calendar to see action on the floor — potentially this week.
Refinancing to lower rates would decrease the amount of each payment that goes to interest, meaning borrowers could pay their loans down quicker and reducing the total amount they pay over the life of their loan. For those of us with high balances and high interest rates, refinancing could mean paying tens of thousands of dollars less.
The bill must pass both the Senate and the House of Representatives to become law. It is likely to pass the Senate, but is far less likely to get through the House in its current state because the refinancing provisions would be paid for with new taxes on those with very high incomes.
I’ll keep an eye on this one too and report back as the bill passes, changes, or dies.
Have a great week everyone!