Biden’s Student Loan Repayment Plan Could Slash Monthly Payments

The president didn’t just cancel some federal student debt last week – he also announced an overhaul of income-driven repayment plans that could impact millions of borrowers.
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  • This new plan will be the cheapest option for borrowers once activated.
  • Those with less than $12,000 in student debt will benefit the most.
  • Advocates praised the details, saying it addresses problems seen in existing IDR plans.

President Joe Biden's plan to cancel wide swaths of federal student debt has grabbed headlines for nearly a week, but that announcement also promised an overhaul of income-driven repayment (IDR) that could slash some borrowers’ monthly payments.

Biden’s debt-relief announcement last week included an update to the Department of Education's (ED) previously proposed income-driven repayment (IDR) plan that would set monthly payments for borrowers at new, lower levels compared to existing plans.

According to a White House fact sheet, this new IDR plan would cap monthly payments at 5% of a person's discretionary income.

The lowest monthly payment under existing plans is 10% of discretionary income, while some IDR plans have it at 20%. This change would, therefore, constitute a significant departure from past efforts to keep monthly student loan payments affordable for low- and middle-income borrowers.

Additionally, Biden's new IDR plan would raise the threshold for what it considered discretionary income to begin with. Only income above 225% of the federal poverty line would be considered discretionary. Anybody making less than that will not have to make loan payments.

According to the White House, this threshold is the annual equivalent of a $15 per hour minimum wage for a single borrower.

This IDR proposal would also grant complete forgiveness for borrowers who make 10 years' worth of payments under the plan if their original loan balance was $12,000 or less. Borrowers above that threshold would qualify for complete cancellation of their loan after 20 years of qualifying payments, which is in line with most existing plans.

Lastly, the department promised to cover a borrower's unpaid interest, meaning a loan's balance won't continue to rise when a borrower's monthly payments are lower than what interest would add. This is known as negative amortization, something advocates called for in a BestColleges survey of borrower advocates who helped craft an "ideal" IDR plan.

A Departure From ED's Previous IDR Proposal

ED representatives met with higher education stakeholders, including college administrators and borrower advocates, to create a new IDR plan in December.

However, negotiations stalled when most stakeholders felt ED's proposal didn't go far enough in addressing the needs of low-income borrowers. ED's primary representative seemed unwilling at the time to meet some of the negotiators' wishes, which included lowering monthly payments and the time to debt cancellation.

The IDR plan put forward this week seemingly goes a long way toward meeting negotiators where they wanted to be.

ED's December proposal said borrowers would pay 5% of the portion of their income monthly that falls between 200% and 300% of the poverty line. Monthly payments would be 10% for all income above 300% of the line.

The recent update eliminates the tiered structure and opts for a lower flat rate.

It also raises the percentage of a borrower's income not included as discretionary income from 200% of the poverty line to 225%.

ED's previous proposal offered loan cancellation after 20 years, but it did not include a shortened timeline for those with lower loan balances. Nor did the previous proposal address the problem of negative amortization.

Student-Advocates Applaud IDR Changes

Michaela Martin, a negotiator representing students during the rulemaking process for this plan late last year, told BestColleges that these are welcome changes to ED's previous proposal.

She called the update both shocking and impressive for how it will address many of the existing problems with the current IDR plans.

"This is far from what ED put forward," she said. "This is a huge step in the direction of what the bulk of negotiators were asking."

Martin said the thing she would still like to change is shortening the timeline to forgiveness for all borrowers on this plan, not just those with $12,000 or less in federal student loan debt.

Tiara Moultrie, a fellow at the Century Foundation, told BestColleges that we won't know for sure what the new IDR plan will look like until ED releases its notice of proposed rulemaking. ED previously stated it would release this during the summer but delayed that process in July, putting the timeline for implementation in question.

An ED spokesperson previously told BestColleges that the department is aiming to make this IDR plan, called the Expanded Income-Contingent Repayment (EICR) Plan, available by July 1, 2023.

Moultrie clarified that this would be a new plan since the department does not have the authority to eliminate any of the four existing IDR plans.