Last week, the Obama administration finalized regulations for Pay-As-You-Earn (PAYE). The program is an update to the existing Income-Based Repayment (IBR) plan, and it allows federal student loan borrowers to pay ten percent of their income every month and receive loan forgiveness after 20 years, changed from 15 percent of borrowers’ monthly incomes and 25-year loan forgiveness under the old version of IBR. The Federal Education Budget Project released a report last month demonstrating that PAYE will provide windfall benefits to graduate and professional students, even if they end up earning a high-income.
Jason Delisle, director of the FEBP and co-author of the report, spoke with Businessweek about the problems with the new program – and how it is a boon to graduate students, even those earning six-figure salaries by the time they receive loan forgiveness.
An excerpt of the interview is below. Click here to read the full interview.
Businessweek: Based on your findings, what would you tell students thinking about graduate school or getting an MBA? What is the best way for them to take advantage of this program?
Delisle: My advice to people who are about to enter graduate school or get an MBA would be to borrow as much money as they possibly can through the federal student loan program. They shouldn’t use their own money, savings, or income to pay for it because the risks or the downside of this having real financial consequences for you, provided this program is in place, are almost zero. And to the extent that there are risks, they are well worth taking because the potential upside is pretty big on this.
Businessweek: … Do you fear this will encourage graduate schools to raise their tuition, especially lower-tier schools?
Delisle: You can imagine schools that are having problems enrolling students or getting them to pay tuition hiring financial planners to come on campus and do seminars. They’ll be able to tell them, Here is why you don’t have to worry about how much you are borrowing to pay for school, or here’s why you don’t have to worry if you don’t land a great job. This is money coming in the door for the schools and none of it is far-fetched. Some of this stuff looks like shady infomercial stuff, but it is a real program that is about to take effect.
Read the full report here.