After summarizing President Obama's 2015 Budget Proposal last week, I was amazed at how much confusion there was related to the Public Service Loan Forgiveness Cap ($57,500) and the new Pay As You Earn limits and benefits. So instead of just guessing, I decided to reach out to the Department of Education's Press Office for guidance and clarification. They consulted with ED's Office of Budget Services and were gracious enough to promptly answer my questions. Below are the questions and the the official statements from the Department of Education.
1) Will the Proposed PSLF cap ($57,500) only apply to New Borrowers after July 1, 2015 (and those who opt into the new program)? Or to all borrowers? Or all borrowers that use PAYE as a repayment plan (see question #2 for clarification)?
This has been an issue of great concern for current borrowers and official clarification would be helpful. See [AskHeatherJarvis] [Boston Student Loan Lawyer Adam Minsky] and Comments in [New America Foundation]. Also, PSLF is a separate statute from PAYE, so how would ED/Congress change PSLF to only effect future PAYE borrowers? Would it create a new time period for PSLF or create new language in the PAYE program for a new PSLF program? If the PSLF statute (20 USC 1087e(m)) is changed to include the cap (without clarification), then it would appear to apply to all borrowers. Any guidance on this would help.
ED's Answer: For all new borrowers (with minor exceptions) starting with the 2015-2016 academic year the new expanded PAYE program will be the only income-based repayment plan available so the cap applies. For any other existing borrowers they retain the income-based repayment plan in their promissory note but if they choose to switch to the new expanded PAYE program, they have to accept all the conditions including the caps.
2) Will there be two PAYE programs, one for current PAYE borrowers that use current PAYE terms and another for borrowers after July 1, 2015 (and those whose opt-in) that will use the proposed PAYE terms? Or will all current PAYE borrowers be subject to the new limitations?
For example, a borrower who currently has IBR but qualifies for PAYE. If he/she successfully applies for PAYE now, will the borrower be subject to the new PAYE proposals? This situation could also apply for new graduates determining whether to do PAYE or IBR or the standard repayment plan.
ED's Answer: The Department currently runs multiple income based repayment plans: two ICR plans, 2 IBR plans and the current PAYE. The plan borrowers are entitled to is defined in their promissory note and cannot be taken away. In some cases borrowers have an option to switch to a newer plan (under the proposal all borrowers will have the option to switch) but they retain the p-note right to remain or switch back to their original plan.
3) The proposal states that it will limit negative amortization of interest on student loans (interest accruing, even if there are on-time monthly payments) to 50%. Does that mean the interest will be limited to 50% of unpaid interest each month or that interest can only accrue to 50% of the original loan debt?
Answer: If a borrower is in negative amortization – that is, their payment does not fully pay that month’s accrued interest – only 50% of the unpaid interest will be accrued to the unpaid balance. An example: the monthly accrual amount is $100 in principal and $10 in interest. If the borrower’s income is below 150% of the poverty line and, therefore, does not make any payments then only 50% of the interest or $5 would accrue and be added to their balance.
4) Clarification on Loan Forgiveness on income-driven plans.
President Obama's press release mentions that income driven plans after 20 (or 25 years) will be forgiven (non-taxable) instead of taxable cancelled debt. White House Press Release. March 4, 2014. ED's proposal mentions this off-hand by stating that income-driven plans will be forgiven after 20 (or 25 years) but it is not officially part of ED's proposed bullets. In order to remove the taxability of canceled PAYE/IBR debt, the PAYE/IBR statutes must be reworded through legislation. To be clear, is ED proposing to change to IBR/PAYE (or only PAYE?) statute(s) to make debt discharges after 20 to 25 years non-taxable?
ED's Answer: This is a Treasury proposal and they have the details. The tax-exemption applies to all income based repayment plans.
UPDATE: The Department of Education's Press Office followed up with the the source for Treasury's Proposal to exclude debt forgiven from Income-Based Repayment and Income-Contingent (includes PAYE)). It can be found on page 149 of the General Explanations of the Administration’s Fiscal Year 2015 Revenue Proposals (PDF). In the same document on page 282, the estimated cost of this proposal is $5 million for the years 2015 through 2024.
Treasury's Proposal: The proposal would exclude from gross income amounts forgiven at the end of the repayment period for certain borrowers using the income-contingent repayment option or the income-based repayment option.
The provision would be effective for loans forgiven after December 31, 2014
Apology: In this article, I 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.
UPDATE (3/26/14): Read ED's Further Clarification on 2015 Budget Proposals (Combined Incomes, PSLF Caps, PAYE Terms)
- Summary and Analysis of Obama's 2015 Budget Proposal
- Further Clarification on Budget Proposal (Combined Incomes, PSLF Caps, PAYE Terms)
- Is Public Service Loan Forgiveness Real? Can It Be Changed?
- Summary of Public Service Loan Forgiveness