Financial Advice

A New Student Loan Plan Could Lower Your Payments … But There’s a Catch

The Department of Education is inviting people to comment on a series of changes it plans to make to its student-loan relief programs.

Although much of it comes as welcome news, one of the ED’s modifications is troubling. But first, a sampling of the good stuff.

The revised Pay As You Earn plan (REPAYE) tackles the problem of so-called negative amortization. It limits the amount of unpaid interest that can been added to the loan balance when the new monthly payment that’s calculated under one of the department’s various income-contingent plans turns out to be less than the interest due.

The ED also says it will soon address another sticky matter that has plagued relief-seekers: recertification. Currently, income-contingent plan participants must annually requalify for assistance by submitting copies of their prior-year tax returns and sometimes other documentation. The department announced it is laying the groundwork for borrowers to authorize the IRS to automatically share their returns with the agency when they are filed.

As for the roughly $300 billion dollars’ worth of loans that remain unpaid under the discontinued Federal Family Education Loan program, the ED is moving to ensure that military service personnel are more efficiently identified so they will receive their entitled accommodations. Other troubled borrowers are to be provided with the proper level of financial and educational support as well.

Now for the change that gives me pause. It has to do with the methodology for determining financial hardship.

The department’s income-contingent repayment plans have thus far used aggregate household income (AGI, per the IRS filings) as a starting point for determining the extent to which financial hardship exists and the basis for calculating an “affordable” monthly payment amount as a result. The ED’s worry, however, has to do with the potential for married couples to game the system by filing separate tax returns. So it will now require that incomes for both spouses be reported for these purposes.

I admit I hadn’t focused on the notion of “household income” until I read this change. Now I have mixed feelings about it.

Suppose a couple decides to tie the knot. Also suppose one half of the couple earns $50,000 per year and has a $20,000 car loan; the other half makes $30,000, has $5,000 in credit card debt, a $10,000 car loan and $25,000 in student loans—all in arrears.

The second half of the couple’s lenders would love to add the first half to all the debt currently on the books because of his or her relatively light debt-load. That can’t be done though, even after the couple marries because the first spouse wasn’t a party to the loans undertaken by the second. The only way for a lender to gain an added obligor is by explicit consent.

Clearly, the methodology the ED has in place and the modification it plans to implement runs contrary to that. Clearly, the methodology the ED has in place and the modification it plans to implement runs contrary to that. (And lest you think the government has the market cornered on stealthy ways of offsetting risk, consider how some private lenders require loan co-signers, whose obligations they are loath to release later on.)

Even more troubling is the fundamental problem with using aggregate household income in the first place: It fails to take into consideration the possibility (if not, likelihood) that both spouses are already tapped out.

Given the rapidly deteriorating payment performance on this second-largest form of consumer debt in the U.S., there is no question that relief is needed—if only to avoid additionally burdening taxpayers who will have to make good on the government’s loan guarantees.

And while it would make so much more sense to bite the bullet and refinance every single dollar of these loans across the board, I have to question the ethics of punishing two people for the sins that may only have been committed by one.

This story is an Op/Ed contribution to and does not necessarily represent the views of the company or its partners.

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This article by Mitchell D. Weiss was distributed by the Personal Finance Syndication Network.