Adam Minsky is a Boston attorney who specializes in student loan law. Still paying off his own loans, he is enrolled in an income-based repayment plan.
SEE OUR SLIDE SHOW: 7 Smart Ways to Pay for College
How does the new repayment plan work?
Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
The best way to describe it is in relation to the current income-based repayment plan. The IBR plan allows federal loan borrowers who qualify based on their income in relation to their loans to pay 15% of their discretionary income (the amount by which adjusted gross income exceeds the poverty line, accounting for family size). After 25 years, any remaining balance is forgiven. The new Pay As You Earn plan cuts payments to 10% of income and cuts the payment period from 25 to 20 years.
Are all federal loans eligible for the plan?
No, only Direct student loans, funded by the U.S. Department of Education. Direct PLUS loans made to parents and consolidation loans that repay parent PLUS loans aren't eligible. The catch with Pay As You Earn is that it doesn’t apply to every borrower. To qualify, you can't have had outstanding federal loans as of October 1, 2007, and you have to have received a new loan on or after October 1, 2011. That effectively disqualifies most people in repayment now.
What can they do?
IBR will remain available for people who qualify. So will income-contingent repayment, which, like IBR, also has a 25-year repayment period but requires payments of 20% of income. The good news is that there are a lot of helpful programs. Consolidation can make management of loans easier. Forgiveness options are available, based not just on income but also on profession—such as public service.
What about students with private loans?
None of these programs exist for private loans. Their terms are often worse, with higher rates, longer repayment and less-generous forbearance. Private student loan problems in this country are huge.
How many students will the new program help?
It's hard to say. But anything that ensures that college grads stay afloat is helpful. The consequences of defaulting on federal loans are severe. The government can garnish wages, offset federal benefits or seize tax refunds. And there's no statute of limitations; collectors can literally pursue you to the grave.
This article first appeared in Kiplinger's Personal Finance magazine. For more help with your personal finances and investments, please subscribe to the magazine. It might be the best investment you ever make.
-
AI Goes To SchoolThe Kiplinger Letter Artificial intelligence is rapidly heading to K-12 classrooms nationwide. Expect tech companies to cash in on the fast-emerging trend.
-
Where to Invest in an Uncertain MarketIn an uncertain market, you can still pocket juicy payouts ranging from 4% to 14%, depending on risk.
-
How Intrafamily Loans Can Bridge the Education Funding GapTo avoid triggering federal gift taxes, a family member can lend a student money for education at IRS-set interest rates. Here's what to keep in mind.
-
How an Irrevocable Trust Could Pay for EducationAn education trust can be set up for one person or multiple people, and the trust maker decides how the money should be used and at what age.
-
UTMA: A Flexible Alternative for Education Expenses and MoreThis custodial account can be used to pay for anything once the beneficiary is considered an adult in their state. There are some considerations, though.
-
Coverdell Education Savings Accounts: A Deep DiveWhile there are some limitations on income and contributions, as well as other restrictions, a Coverdell can be a bit more flexible than a 529 plan.
-
529 Plans: A Powerful Way to Tackle Rising Education CostsContributions to 529 plans grow tax-free and are not taxed when they are used to pay for qualified educational expenses for the beneficiary.
-
Roth IRA Contribution Limits for 2025Roth IRAs Roth IRA contribution limits have gone up. Here's what you need to know.
-
Four Tips for Renting Out Your Home on Airbnbreal estate Here's what you should know before listing your home on Airbnb.
-
Five Ways to a Cheap Last-Minute VacationTravel It is possible to pull off a cheap last-minute vacation. Here are some tips to make it happen.
