What are the negative parts of the new Pay As You Earn Changes?

Life at work has been crazy. Probably 1 in 20 questions has been about the new regulations for Pay As You Earn. Most people don’t realize this isn’t targeted until December 2015 and are trying to jump in now. However as is typical in politics, the Obama administration led with the good and buried what could be the negative. Now since it is my job (and the job of others whose great work I have read) to evaluate this overall, here is a look at some of the “negatives.” Naturally all of these are based on the information we know now which can change between now and implementation.

First just to outline the good again real quick. This will allow many borrowers who did not qualify previous to qualify for PAYE and have their payments based on 10% of their income after adjustments. It also will allow total loan forgiveness instead of cancellation at the end.

For one it will close the MFS loophole. As you a reader questioned me on a few weeks ago, people often times debate whether to file Married Filing Separately and take the tax hit or file Married Filing Jointly and have both incomes count. However under the new PAYE plan this is will no longer be the case as if you are married you must include your spouse’s income.

Also currently for both PAYE and IBR there is a cap on how high your plan can go. The best example you can use is a doctor. Let’s say in residency they are making $45,000 a year and have a payment of $100.00 under the PAYE plan where their normal payment on a 10-year term would be $1,400.00. Now lets say that doctor goes up to $400,000.00 income. Under the current plan the most it could go up to is the $1,400.00 and not a penny more. But if this would make the payment go up to lets say a fictitious $2,000.00 then the payment could be more than it would be on the 10-year.

This will primarily hurt professionals starting out and those who get married to someone with a much higher income especially with the first change that was talked about.

The one that is really not talked about is the capping of the PSLF plan. Currently after your 10-years of service making 120 qualifying payments, the remainder of your loan debt will be forgiven. It doesn’t matter if this is $5,000.00 or $500,000.00. Now under the new plan this forgiveness will be capped at $57,500.00. This is done presumably to stop irresponsible borrowing as many people were going out and getting educations at the most expensive school that led to a small income but did not worry since it would be forgiven.

Also previously your payment plan under PAYE would always be 20 years unless you paid it off faster. This may not be the case anymore. If you have debt over $57,500 then you must pay for 25 years instead of 20. Though this may be a small price to pay since it seems they are doing forgiveness instead of debt cancellation.

The last of the points that relate directly back to the proposal is probably the most trivial. You must be paying on PAYE the entire 10 years for PSLF to qualify instead of now where a payment on the regular payment plan would count. Now this situation rarely occured as people couldn’t afford their regular payment plans and went on plans that were not qualifying before they went on an Income-Driven plan. I view this one as the least of the damning parts.

Finally the downside may be the reliance on the government. This one is up for debate and personal preference but I was thinking of it as I was listening to Dave Ramsey the other day. A pharmacist was calling in saying their payment on PAYE was relatively low and would be gone after 20 years. Dave told him to cut his lifestyle closer to the national average and get it paid off much quicker. His point was that you a)shouldn’t rely on the government to save you and b)20 years to get from under something without putting in extra work (such as additional jobs, etc) was taking the easy way out. I am always in favor of getting loan debt paid off as quickly as possible and almost always tend to fall on the side of Mr. Ramsey. However it is my professional obligation to help everyone in their situations so I figured I would bring the point up but not elaborate nor harp on it.

Overall I do believe this plan will do what it intends to and help some that are struggling. But with anything it will hurt others and needs to be looked at in a larger sense to decide its net benefit.