A New Student Loan Plan Could Lower Your Payments… But There’s a Catch

The Department of Education is inviting people to comment on a series of changes it plans to make to its student-loan relief programs.

Although much of it comes as welcome news, one of the ED’s modifications is troubling. But first, a sampling of the good stuff.

The revised Pay As You Earn plan (REPAYE) tackles the problem of so-called negative amortization. It limits the amount of unpaid interest that can been added to the loan balance when the new monthly payment that’s calculated under one of the department’s various income-contingent plans turns out to be less than the interest due.

The ED also says it will soon address another sticky matter that has plagued relief-seekers: recertification. Currently, income-contingent plan participants must annually requalify for assistance by submitting copies of their prior-year tax returns and sometimes other documentation. The department announced it is laying the groundwork for borrowers to authorize the IRS to automatically share their returns with the agency when they are filed.

As for the roughly $300 billion dollars’ worth of loans that remain unpaid under the discontinued Federal Family Education Loan program, the ED is moving to ensure that military service personnel are more efficiently identified so they will receive their entitled accommodations. Other troubled borrowers are to be provided with the proper level of financial and educational support as well.

Now for the change that gives me pause. It has to do with the methodology for determining financial hardship.

The department’s income-contingent repayment plans have thus far used aggregate household income (AGI, per the IRS filings) as a starting point for determining the extent to which financial hardship exists and the basis for calculating an “affordable” monthly payment amount as a result. The ED’s worry, however, has to do with the potential for married couples to game the system by filing separate tax returns. So it will now require that incomes for both spouses be reported for these purposes.

I admit I hadn’t focused on the notion of “household income” until I read this change. Now I have mixed feelings about it.

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Mitchell D. Weiss

Mitchell D. Weiss is a financial services industry executive and entrepreneur. He is also an Executive-in-Residence at the University of Hartford, co-founder of the university’s Center for Personal Financial Responsibility and adjunct faculty at Rutgers University. His most recent text, Practical Finance - A Straightforward Guide to Personal and Entrepreneurial Finance, is the basis for the course he teaches at both institutions.

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