The new Pay As You Earn program will have a huge impact on your children if they borrow on student loans.
In part one of this series, I talked about the new Pay As You Earn (PAYE) program. The government made a big change late in 2012 that will make it easier for new borrowers to reduce their monthly student loan payments. That might sound good at first glance, but there are some nasty ramifications lurking beneath the surface.
And the government is offering a big carrot to go with that change – the promise of debt forgiveness after 20 years.
Uncle Sam says “Don’t worry if you have a bunch of student loan debt 20 years after you get out of school. We’ll have a nice little 20-year anniversary gift waiting for you. We’ll forgive the debt. A gift from Uncle Sam to you. And it’s all FREE. Just sign your name right here on the Master Promissory Note.”
The primary value in the new repayment plan is it provides a safety net for a person trapped in student loans. The problem is the plan has downsides that will harm your child financially for years to come.
Here’s 11 downsides you need to understand before you and your child decide to get into this new program (or borrow on student loans at all).
- Puts more people into debt… increases the amount they borrow… and keeps them in debt longer (that’s not the path to financial freedom)
- Creates a family legacy of debt (hard to save for a kid’s college while staying in debt for 20+ years)
- Feeds the college cost explosion (college costs will go up even faster)
- Encourages “underwater basket weaving” degrees (a degree that does not pay well is not a problem unless you borrow money to do it)
- Promotes spending over saving (this is the path to the poor house)
- Adds to wealth inequality (going into debt and staying there for years and years creates people who are broke)
- Creates strange financial incentives (getting married encourages you to file separate returns or your spouse’s income will be considered in setting your monthly payment)
- Discourages parents from using money they have saved for college (why use saved money when the government will forgive the debt)
- Encourages reliance on the government (once your debt starts growing because of the low monthly payment, you become more and more dependent on the government’s promise of forgiveness)
- It may get in the way of marriage (it will create some interesting pre-engagement discussions about each person’s student debt)
- Results in more parents going into debt (as college costs rise, more parents will borrow money on top of their child’s student loans)
And there’s more…
I will continue this series in upcoming posts and we’ll look at some specific examples so you can see how this program will impact you and your children.
Stay tuned for Part 3 (and beyond) on this subject.
Then you can decide whether you should encourage your child to get into this new program.
Click here to see how Pay As You Earn provides forgiveness even if your household income over the 20 years of repayment was $5,000,000. Surprising the program is designed this way… but it is!