There has been a lot of press recently about expanding the Pay As You Earn (PAYE) plan for paying back your student loans. Generally speaking, Pay as You Earn creates a payment of 10% of your income. And promises debt forgiveness after 20 years. It’s ...

 

Freedom From Student Loans - 5 new articles


Pay As You Earn is Not What it Appears

There has been a lot of press recently about expanding the Pay As You Earn (PAYE) plan for paying back your student loans. Generally speaking, Pay as You Earn creates a payment of 10% of your income. And promises debt forgiveness after 20 years.

It’s important to keep your “common sense” hat on when looking at this program and deciding which repayment plan is in your best interest. You pay down debt by paying down the principal balance. The more you pay, the more the debt goes down.

The allure of PAYE is to reduce your monthly payment. The opposite of what it takes to drive your student loan balance down.

Here are some posts that will help you if you are considering one of the student loan repayment plans based on income.

The Pay As You Earn Plan Drives More People Deeper Into Student Debt

And this is part 2 in a series 11 downsides to be aware of.

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How Are You Doing on Your Budget So Far?

A monthly budget is a powerful tool for paying off your student loans.

As Dave Ramsey says, a budget is how you make your money behave! He also says that using a budget will make you feel like you got a raise. It’s true.

Erasing $20,000 in Debt in 2 Years – In New York City!

Here is a quote from a great story about getting serious, and using a budget, to get rid of your student loans.

“Just months after getting our diplomas framed, Joanna and I sat down and got serious about our finances and attacking our $20,000+ in student loan debt. While interest rates were favorable and our cumulative debt was lower than many graduates, we couldn’t stand the feeling of owing anything to anyone. Imagine our conundrum when I got my dream job offer from a storied advertising agency in New York — the most expensive city in America.

Despite a cost of living that’s 125 percent higher than the U.S. average, we were committed to paying off our debt in two years. And the craziest part of it all? We did it. (We were in Manhattan for a year and a half, and then we moved to Boston for a year.)”

Here’s another quote about how they attacked the debt.

“Instead of first budgeting out typical expense categories (food, transportation, tourist activities, etc.), we figured out how much we wanted to put toward paying down our debt each month. After subtracting that from our monthly income, we knew how much money we had remaining for all of our discretionary and leisure spending.

We created an itemized budget and then tracked our expenses like accountants from the Internal Revenue Service. Every penny of every expense was accounted for throughout each month. If we noticed that our $350 food budget was running low halfway through the month, we knew to cut back or face the wrath of beans, rice and ramen for the duration. This tracking helped ensure that our get-out-of-debt goals were walking the walk.”

Here’s the full article about how they did it. Check it out. It’s a fun and motivating story.

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The Pay As You Earn Plan Drives More People Deeper Into Student Debt

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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Interest on Student Loans is Your Enemy

You probably have lots of friends in your life. But I promise you, interest on your student loans is not one of them.

Interest on student loans is your enemy. And the only way you can kill the little bastard is by making sure that your monthly payment is big enough to pay the interest for the month plus as big a chunk of the principal as humanly possible.

Tuition.io wrote a great post that will help you learn more about how interest on your student loans really works. You’ll do yourself a big favor to read it now.

Interest on student loans works different than what you may be accustomed to on credit cards or cars.

VERY different.

Especially if you are on one of the programs that provides you a “low monthly payment”.

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A Fun Story of a Couple Who Got Serious About Paying Off Their Student Loans

Here’s a fun story about a couple who got serious about paying their student loans off quickly. It’s a great example of being intentional about getting out of debt.

Here is the essence of how this couple decided to tackle their student loans.

“Rather than starting off our adult lives buying new vehicles, taking vacations, purchasing new electronics and appliances, or buying a home, we denied ourselves these enticements. Rather, we rented a small 600 square foot apartment, worked overtime, made most of our meals at home, didn’t take vacations, and drove used cars.

In turn, we were able to keep costs to about a 30 percent of our combined income. This allowed much more money to go toward student loans.

And by paying as much as we could toward loans rather than just the standard monthly payment, we had my wife’s loans paid off in less than three years…and so, the wedding planning began.”

It took sacrifice and a commitment to make it happen. That’s the important takeaway.

I doubt it was necessary to hold off the wedding until they got rid of the student loans! But maybe that helped.

If nothing else, it made the story a little more controversial… and probably increased the number of people who read it.

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