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Pay As You Earn is Not What it Appears

There has been a lot of press recently about expanding the Pay As You Earn (PAYE) plan for paying back your student loans. Generally speaking, Pay as You Earn creates a payment of 10% of your income. And promises debt forgiveness after 20 years.

It’s important to keep your “common sense” hat on when looking at this program and deciding which repayment plan is in your best interest. You pay down debt by paying down the principal balance. The more you pay, the more the debt goes down.

The allure of PAYE is to reduce your monthly payment. The opposite of what it takes to drive your student loan balance down.

Here are some posts that will help you if you are considering one of the student loan repayment plans based on income.

The Pay As You Earn Plan Drives More People Deeper Into Student Debt

And this is part 2 in a series 11 downsides to be aware of.

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How Are You Doing on Your Budget So Far?

A monthly budget is a powerful tool for paying off your student loans.

As Dave Ramsey says, a budget is how you make your money behave! He also says that using a budget will make you feel like you got a raise. It’s true.

Erasing $20,000 in Debt in 2 Years – In New York City!

Here is a quote from a great story about getting serious, and using a budget, to get rid of your student loans.

“Just months after getting our diplomas framed, Joanna and I sat down and got serious about our finances and attacking our $20,000+ in student loan debt. While interest rates were favorable and our cumulative debt was lower than many graduates, we couldn’t stand the feeling of owing anything to anyone. Imagine our conundrum when I got my dream job offer from a storied advertising agency in New York — the most expensive city in America.

Despite a cost of living that’s 125 percent higher than the U.S. average, we were committed to paying off our debt in two years. And the craziest part of it all? We did it. (We were in Manhattan for a year and a half, and then we moved to Boston for a year.)”

Here’s another quote about how they attacked the debt.

“Instead of first budgeting out typical expense categories (food, transportation, tourist activities, etc.), we figured out how much we wanted to put toward paying down our debt each month. After subtracting that from our monthly income, we knew how much money we had remaining for all of our discretionary and leisure spending.

We created an itemized budget and then tracked our expenses like accountants from the Internal Revenue Service. Every penny of every expense was accounted for throughout each month. If we noticed that our $350 food budget was running low halfway through the month, we knew to cut back or face the wrath of beans, rice and ramen for the duration. This tracking helped ensure that our get-out-of-debt goals were walking the walk.”

Here’s the full article about how they did it. Check it out. It’s a fun and motivating story.

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The Pay As You Earn Plan Drives More People Deeper Into Student Debt

The Pay As You Earn (PAYE) student loan repayment plan is driving more people deeper into debt. Its original intent was noble because it can provide a safety net for those with large student loans and who do not graduate or who do not make a lot of money after college. The bad news is [...]

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Interest on Student Loans is Your Enemy

You probably have lots of friends in your life. But I promise you, interest on your student loans is not one of them. Interest on student loans is your enemy. And the only way you can kill the little bastard is by making sure that your monthly payment is big enough to pay the interest [...]

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A Fun Story of a Couple Who Got Serious About Paying Off Their Student Loans

Here’s a fun story about a couple who got serious about paying their student loans off quickly. It’s a great example of being intentional about getting out of debt. Here is the essence of how this couple decided to tackle their student loans. “Rather than starting off our adult lives buying new vehicles, taking vacations, [...]

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Changing Your Family Tree

I love to hear stories of people dealing with student loans and deciding to pay them off quickly. And I really love it when they go so far as to start saving for their own children’s college… even grandchildren’s college. Roger wrote this on a LinkedIn article I published about student loans and how they [...]

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