On Tuesday, President Joe Biden’s administration outlined its proposal to overhaul income-driven repayment (IDR) plans. The series of changes to the federal REPAYE program are set to take effect later in the year and would make the program the best option for the vast majority of borrowers. Borrowers currently have four different IDR plans to choose from and the proposal could significantly reduce the financial burden they face by lowering payments and offering forgiveness options. Changes to the REPAYE plan are a part of a larger effort by Biden to help curb often-crushing student loan debt. In theory, the new repayment plan could be paired with loan forgiveness of up to $20,000—however, that program is on hold until the Supreme Court rules on the legal challenges that were filed shortly after the loan forgiveness program was announced in August. The pandemic-era pause on interest and required payments on federally-held loans has been extended until the case is decided. The proposed REPAYE changes alone would have a huge effect on borrowers’ finances, lowering total student loan payments by 40% for future borrowers, the Department of Education estimated. Here’s how the student loan system is changing, and how it could impact your finances if you’re a current student loan borrower or are planning to take out loans to pay for college.
Payments would be cut by more than half.
Borrowers who enroll in the new REPAYE plan would never have to pay more than 5% of their discretionary income towards their undergraduate student loan payments, compared to a 10% maximum under current rules. Not only that, but “discretionary income” would be defined more generously, as any income more than 225% of the federal poverty line, compared to 150% today. You won’t have to make any payments at all if your income is low enough. Just like under the current rules, those with $0 monthly payments will still count as making progress toward eventual forgiveness. Taken together, the changes would require the typical graduate of a public four-year university to pay $2,000 less per year toward their student loan, the department estimated.
Loans could be forgiven after 10 years.
For those who borrow $12,000 or less, your loan will be forgiven after 10 years as long as you make regular payments. That’s half of the 20-year forgiveness in the current plan. For every $1,000 in excess of that amount, you’ll have to pay for one additional year, up to a max of 20 years, or 25 years if you have graduate school loans. At that time, just as with the current rules, your remaining loan balance would be forgiven no matter how much or how little you’ve paid it off. These changes would especially help community college students, 85% of whom would see their loans wiped out after paying for 10 years or less, the department calculated.
Your loan balance won’t grow as long as you’re making payments.
As long as you make your payments under the new plan—even if your payment amount doesn’t cover the interest your loan is generating, or if you’re paying $0—your loan balance won’t grow. As it stands, 70% of borrowers with income-driven repayment plans see their loan balances steadily increase over time because their payments are less than the interest.
The focus is on students’ undergrad loans.
The changes to the REPAYE plan don’t cover all types of student loans, however. The 5% of discretionary income cap on payments only applies to undergraduate loans, not graduate school loans. Parent PLUS loans still cannot be consolidated to become eligible for a REPAYE plan under the proposal. Instead, they can still switch to the older and less generous Income Contingent Repayment plan.
Critics say the plan will make college more expensive.
Critics of the proposal point out that it could encourage students to overspend on education, contributing to rising college costs and costing taxpayers hundreds of billions of dollars.The proposed rules are so generous, students would have little incentive to limit the costs of their education, the Committee for a Responsible Federal Budget, an anti-deficit think tank, said in a statement. “Today’s IDR rule risks transforming the student loan system into an arbitrary grant program that creates more confusion than cohesion and establishes a series of perverse incentives that lead students to take out large sums of debt and colleges to charge increasingly exorbitant tuitions,” the group said in a statement.
Student loan advocates say it doesn’t go far enough.
The proposed set of changes will help many borrowers but should be expanded to cover Parent PLUS loans and graduate school loans, the Student Borrower Protection Center, a nonprofit organization that advocates for student loan borrowers, said in a statement. “Equity demands that these borrowers have equal access to an affordable payment plan and the necessary supports to free themselves from the crushing weight of student debt. The Secretary must include them in the final rule,” Persis Yu, deputy executive director of the SBPC, said in a statement.
It’s not a done deal.
The department said it may make changes to the proposal based on public feedback, before implementing it beginning later this year. Have a question, comment, or story to share? You can reach Diccon at dhyatt@thebalance.com.
