Student loan repayment may be significantly affected by the new tax reform bill!
By Dan Kaibel, CFP®, CFSLA
A big part of the House GOP plan is to eventually end the Federal Direct student loan program. The new program that all federal loans would be issued under would be called the Federal ONE Loan Program instead. Current benefits such as Public Service Loan Forgiveness (PSLF) would not be offered under the new plan. Also, Pay As You Earn (PAYE), Revised Pay As You Earn (REPAYE), and Income Based Repayment (IBR) options would no longer exist.
While the Direct loan program will stop new issuance when the new PROSPER Act takes full effect, existing federal direct student loans would operate by the stipulations in the promissory notes that were signed. This means that the repayment and forgiveness options would continue to be around for existing loans. While those in school and/or with student debt can be affected in a number of ways in the future, one that stands out are those who are counting on Public Service loan forgiveness(PSLF).
This is a good time to review some of the current requirements for PSLF. Those who got their undergraduate, post-grad, seminary, law or medical education while racking up large student loan debt may have been counting on having a lot of this debt forgiven under this program. The requirements involve working in qualified public service which includes those working for government organizations and most 501c’s for at least 120 months. At the end of that period, any remaining balance on these loans would be wiped out with no additional interest, penalties or taxes due.
Moving forward the government student loan options will be under the Federal ONE loan program, with only 2 options to make payments. The Standard 10 Year Plan, which exists today. The second option would be an income driven repayment program. While this program would have not contain a stated forgiveness component, it places a cap on the maximum interest that would have to be paid. That cap is equal to the full interest charged if you paid back your loans on the Standard 10 Year Plan.
So, while the plan doesn’t contain a stated ‘forgiveness option’, it may have an unstated one. So far it doesn’t appear that Congress has caught on to what looks like a loophole. Since the income based option doesn’t really have a term some folks may never pay back their loans with the way the current option is designed. Without a certain repayment periods, this could stretch as long as 50 years (or more). With a life insurance benefit that is expected to be in this plan some borrowers may die before ever getting around to paying these loans off.
So, to summarize continue to look at the best (of many) options that may work out best for you if you already have Federal Direct loans. If you intend to borrow in the future, under the FederalOne program the present value of the cost of the loan payback may be a good way to think about your options. If you're someone that doesn’t end up making a big income and could stretch out loan repayment over 50 years, then the cost in today's dollars would be really low. If you're someone such as a physician making a large income, you might be forced to pay back your loans more quickly. At this point it will probably make more sense to refinance to a private loan with lower interest rates.
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