ED Further Clarifies 2015 Budget Proposals (Combined Incomes, PSLF Caps, PAYE Terms)

The Department of Education has provided further clarification on ED's previous statements about the 2015 Budget Proposal.  Educated Risk received a statement today from a Department of Education spokesperson outlining ED's policy positions for the 2015 Budget Proposals as they relate to combined incomes for current repayment programs, Pay As You Earn repayment terms, and Public Service Loan Forgiveness caps (again).  ED's statements were delayed because the Press Office was seeking responses from other ED program offices.  

The statements further clarify that the new proposed changes will not be retroactive in any way towards current borrowers.  The 2015 Budget Proposals are not law and they may not actually become law through legislation from Congress.  However, they do reflect the policy positions of the Obama Administration and the Department of Education:


1) Will the current method for determining the discretionary income change for current borrowers repaying under IBR and (current) PAYE plans?  Will it change to the new proposed PAYE method for determining discretionary income?

According to a U.S. Department of Education spokesperson, the 2015 Budget Proposal will not impact how discretionary income is calculated for current borrowers repaying under current repayment (PAYE, IBR, ICR) plans.  Currently, a spouse that files taxes separately only uses his or her income to calculate the discretionary income for Income-Based Repayment (15% of discretionary income) or Pay As You Earn (10% of discretionary income).  

The proposed changes would combine both spouses' incomes into the discretionary income calculation, regardless of tax filing status.  If both spouses have loans, then the each individual has 50% of Family Income.  If one person has a loan and the other spouse does not, then the new method would calculate discretionary income for New PAYE using the total household income (100%). This would hurt families with one borrower with high debt levels but has low or no income, borrowers trying to minimize payments for Public Service Loan Forgiveness, or families where only one spouse has debt and other spouse has income.  It also could raise the total amount repaid overtime for cancelation/forgiveness after 20 to 25 years under PAYE.

Current borrowers will have their IBR and PAYE monthly payments calculated the same as they are now.  If a borrower wants to opt into the new PAYE program (with its benefits and limitations), then spousal income would be combined and 50% of the combined income would be used to calculate monthly PAYE payments. As a side note, there could be strange results if one borrowers opted into the new PAYE plan and the other did not.  Presumably, the opted-in borrower would have 50% of the combined income counted towards the monthly PAYE payments whereas the other spouse would only have the income calculated through his or her tax filing (joint or separate).

NEW (4/21/14) Alternatively, ED may also use the current proportionality method for appropriating IBR/PAYE payments. This method, outlined in  34 CFR 685.221(b)(2)(ii) for IBR or 34 CFR 685.209(a)(2)(ii)(B) for PAYE, calculates the family's 10% or 15% payments for the total combined income and then apportions payments based on each spouses percentage of debt. For example, the combined income of Spouse A and Spouse B yields a $500 monthly IBR payment. If Spouse A has $100k of debt and Spouse B has $200k of debt, then A pays roughly $166 and B pays $333. Read more about this calculation here 

Clarification (4/21/14): A reader aptly pointed out a mistake in my analysis of the Combined Income Provision for the Proposed 2015 Budget. For couple, if there is only one spouse with student loans, then the COMBINED Income (100%) is used to calculate IBR/PAYE. The income is only divided when both spouses have student loan debt. I have updated the response above to reflect this. I have also added, for reference, the current method of calculating combined income payments by assigning payments based on each spouse's percentage of loan debt.


2) Can borrowers currently enrolled in the PAYE repayment plan have their terms and conditions changed to the proposed changes without affirmatively opting in?  How does the Master Promissory Note and application form for PAYE impact this?

As a reader aptly pointed out,  Pay As You Earn Repayment Plan is not listed as a repayment option in the Master Promissory Note. ED's previous statements stated that borrowers could "retain the income-based repayment plan in their promissory note" and this statement raised some concerns about whether Pay As You Earn terms and conditions could change.  Currently, PAYE terms are only listed in a regulation (34 C.F.R. § 685.209(a)) and not outlined in federal law. 20 U.S.C. § 1098e(e) gives statutory authority but no specific terms.

According to a U.S. Department of Education spokesperson, the 2015 budget proposal will  not impact current borrowers enrolled in PAYE, even if PAYE terms and conditions change in the future.  Thus, borrowers considering PAYE as a repayment option can apply for PAYE and expect the current repayment terms and conditions for the life of repayment.  Of course, this is just the policy position of ED and not Congress but it does provide some additional security for borrowers trying to determine if they should apply for PAYE right now.

It would appear that current borrowers will be able to always keep their current repayment plan options.  This includes borrowers that are currently eligible for Pay As You Earn.  They would have the option to enroll in the current (old) PAYE plan or the new (proposed) PAYE plan.  This would mean that a borrower with more than $57,500 loans (prior to July 2015) would be able to get loan cancelation after 20 years under the Old PAYE instead of the 25 years as proposed in New PAYE.

3) Will existing borrowers on legacy (pre-7/1/2015) IBR, ICR, and PAYE payment plans who choose to stay on those plans and NOT convert to the new (post-7/1/2015) PAYE plan face the $57,500 cap on PSLF?

There was still a lot of confusion about whether the proposed Public Service Loan Forgiveness cap would apply to current borrowers, even with ED's previous statements. A reader suggested rephrasing the question to make ED's response clearer (see above).

According to a U.S. Department of Education spokesperson, current borrowers will not be subject to the proposed $57,500 cap on Public Service Loan Forgiveness.  This cap will only apply to new borrowers after July 1, 2015 (if legislation mirrors the proposal).  Current borrowers will only be subject to the $57,500 cap if they affirmatively opt into the new PAYE program.  Borrowers repaying or applying for PAYE right now will not be subject to the cap.

Based on this explanation, it would appear that a current borrower would be able to apply for PAYE with current terms after July 1, 2015. so long as the loans were disbursed prior to July 1, 2015.  Thus, current borrowers would be grandfathered-in for the life of their repayment.  For a borrower that has some loans prior to July 1, 2015 and some loans after that date, then it could become confusing because some of the loans would subject to the cap while others would not.

UPDATE: Hat Tip to @Cooper's Comment. According to the 2015 Budget Proposal (page S-13) [PDF], borrowers that have loans disbursed prior to July 1, 2015 will have the old PAYE terms for new loans disbursed after July 1, 2015 as well.  Here is the actual text:

Students who borrowed their first loans prior to July 1, 2015, would continue to be able to select among the existing repayment plans (for plans for which they now qualify and for loans originated through their current course of study), in addition to the modified PAYE. 

So, if a freshman gets student loans for the 2014-15 academic year, they will have the option of getting the current PAYE terms and conditions for ALL loans during his or her "course of study", even loans after July 1, 2015.  It is unclear what "course of study" means, but it presumably includes all loans to finish a program (undergrad or graduate).  It may also mean additional programs. For example a 2014-15 freshman may be able to get current PAYE terms for loans disbursed way after 2015 for graduate school. 


Note:  I have changed the format of these responses because the Department of Education spokesperson provided the comments as background information.  I previously quoted a Department of Education Official without understanding that such comments were on background.  I and Educated Risk regret this error and apologize to the Department of Education spokesperson.


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