Breaking Down The Student Loan PROSPER ACT

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  • Breaking Down The Student Loan PROSPER ACT
Author: Joseph Reinke, CFA

Joseph Reinke, CFA, CEO of FitBUX

We all most likely would agree, current student loan repayment options are complex and to add to it there are way too many options.  The good news is that congress thinks so too so they are trying to simplify things with the proposal of the PROSPER Act.  The bad news…they are considering doing away with one of the best options for financial planning, the level 25 year repayment option.

This article details the two plans that would be accessible as well as a petition you can sign aimed to keep the 25 year level repayment option. Specifically, this article will dig into the math of the proposed new income driven repayment (IDR) plan.  Also, I was recently on a podcast with Talus Media discussing the PROSPER Act which you can listen to below this paragraph.

New Student Loan Repayment Option 1: 10 Year Repayment

Currently, this is the standard option that is already offered. In short, you are required to make a minimum payment. If you do so, the loan is over in 10 years. If you make prepayments, the loan is done sooner.

For example (this math is important to understand the new IDR plan detailed below), if I owe $100,000 and have an interest rate of 6.0% then I would be required to pay $1,110 per month for 120 months. That means over 10 years I would pay $133,224 (This last number is extremely important to understand for the proposed IDR plan).

New Student Loan Repayment Option 2: Income Driven Repayment                              

Currently, income driven student loan repayment plans cap your monthly payments as a percentage of your income.  Your loan balance continues to grow because you are deferring interest. However, after 20 or 25 years the loans are forgiven, REGARDLESS OF HOW MUCH YOU PAY.  However, the amount forgiven is taxed.

The new IDR plan still caps how much you are required to pay each month as a percentage of income.  However, there is NO time period.  You will continue to make payments until you pay the equivalent amount you would’ve paid under option 1, the standard 10 year plan detailed above.

Using our example above means you would make payments until you paid a total of $133,224.  This could take 15 years or it could take 40 years.  This is on $100,000 owed…if you owed $200,000 you would be making payments until you paid a total of $266,449.

The wild card in determining if this is good or not will depend.  When your loans are “forgiven” you will most likely still have a balance that is forgiven.  Currently, that balance is taxed….will it still be taxed or will it not be????

The 25 Year Level Repayment Option

On the chopping block is the 25 level repayment option.  For those of you that are Members of FitBUX or have been to one of our student loan workshops, you have seen how this is one of the most powerful repayment options for financial planning.

Due to my strong belief, I have started a petition as I would like the opportunity to explain to the congress men and women voting on this change why the 25 year repayment option is so important.  If you have a minute please sign it and hopefully we can have our voices heard.

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Joseph Reinke, CFA

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About the Author

Joseph Reinke is a Chartered Financial Analyst (CFA) Charter Holder and founder of FitBUX which has helped over 14,000 young professionals on their journey to financial freedom. Joseph has been personally investing since he was 12 years old.

In addition, he has experience in student loans, mortgages, wealth management, investment banking, valuation, stock trading, and option trading. He has been on 100s of podcast and has been invited to 100s of universities to discuss financial planning with their soon to be graduates.

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