NEW YORK (MainStreet) — Vicki DiStefano is some $18,000 in debt from student loans.
“I took out federal loans, and they accumulated interest while I was still in school,” the 24-year-old Babylon, N.Y. resident told MainStreet. “I walked out with $4,000 more than I asked for. That was quite a shock to me.”
DiStefano, who works as a marketing manager, has been making payments since she graduated from SUNY New Paltz more than three years ago. But she's able to get money back from the government by deducting interest payments on her annual tax return.
DiStefano is among those in student loan debt who use strategies to reduce their debt burden. Yet many of the strategies employed, like student loan forgiveness, end up hurting the government.
That’s why President Obama’s 2016 budget plans a cap on forgiveness at $57,500 with any amount over $57,500 to be carried for up to an additional five years.
Forgive and Regret
In addition to allowing graduates like DiStefano to deduct loan interest payments on their taxes, current rules also completely forgive debt in 20 rather than 25 years.
Dubbed Pay as You Earn, PAYE only requires students to make loan payments equal to 10% as opposed to 15% of their discretionary income, but unless students request the PAYE option, loan services places them into the standard ten-year repayment program.
“Forgiving a student loan entirely winds up costing the government and tax payer’s money,” said Leslie Tayne, a Long Island-based financial attorney and debt specialist.
“What’s being proposed [in Obama's budget plan] is that any balance remaining over the 10 or 20 year forgiveness period will be forgiven in 15 or 25 years,” said Jack Schacht, founder of My College Planning Team.
The PAYE program is especially generous when it comes to how discretionary income is determined. Debtors can deduct 150% of the poverty guideline for a single person or an estimated $17,000.
“Now that more and more students are learning about it, the administration apparently realized the program is no longer sustainable and would blow a very large hole in the federal budget,” Schacht told MainStreet.
Under the President’s proposed changes, married people will no longer be able to list just one income to determine the amount of their loan payment.
“This will help many married couples who may be able to qualify for income sensitive payment plans if their individual income is lower than their spousal income,” Tayne told MainStreet.
Current rules allow married borrowers to exclude their spouse’s income if they file separately. However, they are permitted to include their spouse and children in their household size, which reduces payments even further.
“Without the changes, the whole program would collapse, because the country cannot afford it,” said Schacht.
--Written for MainStreet by Juliette Fairley