As Admiral Ackbar famously said in Star Wars VI: Return of the Jedi, "It's a trap!" The U.S. Department of Education is proposing changes to the income based repayment plan for federal student loans known as Pay As You Earn (PAYE) that would severely hamper married couples where only one spouse has federal loans. If this change goes through, your monthly payment could go up significantly!
What is PAYE Now?
Under the current guidelines, if your loans aren't too old, you can cap your monthly payment at 10% of your disposable income, based on the Adjusted Gross Income (AGI) from your last filed tax return. If there is an unpaid balance after 20 years, then it is discharged.
In addition, should your spouse make more money than you do (or any money at all), you have the option of filing separate tax returns in order to exclude his or her income from the AGI figure.
So Where Is the Trap?
The changes being proposed, though, lure married couples into a trap. Currently, the program is only available to borrowers with recent federal student loans. Anyone with older loans would have to use Income Based Repayment (IBR), which caps payments at 15% of disposable income and makes you wait 25 years for a discharge of the balance. The changes make PAYE available to ALL borrowers, regardless of the age of the loan, which can be very attractive.
But then the trap springs! Oh, you're married? Well, in that case, your spouse's income MUST be included in the AGI, even if you file separate tax returns! The only exceptions are where the borrower is separated from his or her spouse or who is unable to reasonably access his or her spouse’s income. Wow! The only alternative is to use IBR, which could have you paying more over a longer period of time.
Is There Anything I Can Do?
You can still speak out, however! You can submit comments within 30 days of of July 9, 2015, either through the Federal eRulemaking Portal or via postal mail, commercial delivery, or hand delivery to Jean-Didier Giana, U.S. Department of Education, 1990 K Street, NW., room 8055, Washington, DC 20006–8502.
Comments can’t be submitted by fax or by email or those submitted after the comment period. Let them know that if they really want to help student loan borrowers, they will expand the program without penalizing married couples!