The Pay As You Earn (PAYE) student loan repayment plan is driving more people deeper into debt. Its original intent was noble because it can provide a safety net for those with large student loans and who do not graduate or who do not make a lot of money after college.
The bad news is it promotes staying in debt for 20 (10 years in certain cases) years in the hope of some debt forgiveness (which would be taxed as income in many cases). It also makes the monthly payment very low in order to encourage the student to spend money on other stuff. To become a “consumer” and start spending their money.
It also promotes more students going deeper into debt.
The Wall Street Journal wrote an insightful article titled Federal Plans That Forgive Student Debt Skyrocket. Here is a quote from the article at yahoo finance:
“Law schools at Columbia University, the University of Chicago and Georgetown University are among those offering some graduates additional aid to cover all or part of their minimum monthly payments under the federal plans.
Max Norris, a 29-year-old lawyer for the state of California, illustrates the potential costs of the program. He pays about $420 a month to the Education Department on his $172,000 in debt, which he says fails even to cover the interest owed. But his out-of-pocket expense falls to $100 monthly after aid from his school, University of California’s Hastings College of Law.
Mr. Norris, who makes $60,000 a year in his job, would have about $225,000 in debt forgiven after 10 years, assuming he stays in public service and his salary rises 4% annually, according to a repayment calculator created by the New America Foundation, which advocates less-generous forgiveness.
He said he learned of the programs before enrolling. “My intent the whole time in going through law school was to take advantage of this program,” he said.
Schools aren’t shy in touting the programs’ benefits.
Georgetown said on its law-school website until recently the school’s aid combined with the federal plan “means public interest borrowers might not pay a single penny on their loans—ever!”
I wrote a number of posts about the downsides of PAYE to try to prove to you that it was something to stay away from unless you were nearing default on your student loans.
Read this real quick. It summarizes 11 downsides to be aware of.
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