While President Joe Biden’s student loan forgiveness program promising up to $20,000 in one-time debt relief for low- and middle-income borrowers is tied up in the courts, the Department of Education is working on a new repayment plan that has the potential to significantly help both current and future borrowers.
For many federal student loan borrowers, the lesser-known plan, which Biden first announced in August, would not only reduce their monthly payments but also lower the total amount they pay back over time.
Plus, the proposed repayment plan is less likely to face the legal challenges that have stalled Biden’s broad forgiveness program.
Even if the one-time loan forgiveness program is ultimately rejected by the Supreme Court – which will hear arguments in two cases on February 28 – the new loan repayment plan could offer a benefit that’s even more generous for some borrowers.
“This pending change to federal student loans has the potential to be more significant in the long run than President Biden’s broad-based forgiveness plan that is now on hold by the courts,” reads a report published by the Urban Institute, a research nonprofit.
The Department of Education expects to start implementing some parts of the new income-driven repayment plan later this year. But first, the proposal is currently going through a formal rulemaking process, having received more than 13,000 public comments, and changes may be made to the proposal before it takes effect.
A long-term fix
Biden’s forgiveness program, if allowed to move forward, would grant a one-time federal student loan cancellation to individual borrowers who make less than $125,000 a year and households who make less than $250,000 annually. Up to $10,000 would be canceled for qualifying borrowers and another $10,000 of forgiveness would go to those who also received a Pell grant while enrolled in college.
But future federal student loan borrowers would receive nothing from the forgiveness program.
In contrast, the proposed repayment plan would benefit current and future borrowers by lowering the monthly cost and total amount repaid for many low- and middle-income borrowers – as well as by aiming to simplify the program and eliminate common pitfalls that have historically delayed borrowers’ progress toward forgiveness.
Currently, there are several different kinds of income-driven repayment plans. The new proposal would amend one of those, the Revised Pay As You Earn Repayment Plan, or REPAYE, while phasing out the others.
Here’s how the new plan would work
Changes could be made to the proposed income-driven repayment plan before it’s implemented. But here’s how it would work under the official proposal released in January.
Smaller monthly payments: Like in existing income-driven repayment plans, enrolled borrowers would be required to pay a portion of their income regardless of how much outstanding student debt they owe. The new plan would lower the amount of discretionary income borrowers are required to pay.
Those with undergraduate debt would be required to pay 5%, down from 10%. Those with a combination of undergraduate and graduate debt would be required to pay between 5% and 10%. And those with debt from graduate school only would be required to pay 10%.
The new plan would also measure discretionary income differently, increasing the amount of income protected from repayment.
Interest subsidy: Under the new proposal, unpaid interest would not accrue. That means that a borrower’s balance won’t increase even if the person’s monthly payment doesn’t cover the monthly interest.
Shorter time to forgiveness: Currently, borrowers who pay for 20 or 25 years under an income-driven repayment plan will see their remaining balance wiped away. Under the new proposal, those who borrowed $12,000 or less will see their debt forgiven after paying for just 10 years. Every additional $1,000 borrowed above that amount would add one year of monthly payments to the required time a borrower must pay.
There will be a maximum of 20 years of payment for borrowers with only undergraduate loans and 25 years for borrowers with graduate debt.
How generous is the proposed plan?
It’s hard to say just how generous the proposed income-driven repayment plan could be, since it depends in part on an individual borrower’s circumstances.
But for borrowers enrolled in an income-driven repayment plan, their monthly payments will likely be cut in half.
As a result of all the changes to the income-driven plan, single borrowers making less than $30,600 per year would not need to make any payments under the proposal, up from the current $24,000 threshold, according to the Biden administration.
Generally, borrowers with federal loans will qualify to enroll as long as their monthly payments are lower under the income-driven repayment plan than under the standard 10-year plan. Those with very high incomes, for example, may not fit this criteria. Parents who borrowed federal PLUS loans to pay for their children’s college will not be allowed to enroll in the new plan either.
Many borrowers won’t have to pay back the full amount they borrow
Many borrowers enrolled in the proposed income-driven repayment plan won’t end up paying back the full amount they borrowed, according to the Urban Institute report.
The researchers estimated that 78% of bachelor’s degree recipients with a typical amount of student loan debt of $31,000 would end up paying less than the full amount they borrowed over the lifetime of the loans.
For the typical borrower who earned a certificate or associate degree, with $13,000 in debt, researchers found that 89% would pay off less than the full amount borrowed.
For comparison, of those currently enrolled in the most similar existing income-driven repayment plan, 40% of bachelor’s degree recipients and 37% of those with certificates or associate degrees pay back less than the full amount.
Potential for unintended consequences
The proposed income-driven repayment plan comes at a cost to taxpayers. While the Biden administration estimated that the proposal would cost nearly $138 billion over 10 years, independent researchers at the Penn Wharton Budget Model said it would likely cost much more – between $333 billion to $361 billion over a decade.
The difference between the estimates has to do with how many more borrowers are expected to enroll in the new plan.
Second, there are concerns about whether providing borrowers access to a more generous repayment plan will result in colleges charging higher tuition and, in turn, leading students to more borrowing, according to Adam Looney, a nonresident senior fellow at the Brookings Institution.