Biden Proposes Changes to Student Loan Repayment
For millions of people struggling with student loan debt, there’s reason to be optimistic. The Biden administration has released details about how it wants to overhaul the existing income-driven repayment (IDR) plan for federal student loan borrowers, known as Revised Pay As You Earn Plan or REPAYE.1 While related to President Joe Biden’s well-known plan for student loan forgiveness, this is actually a separate effort. So, what’s included in the new initiative? Let’s take a closer look at some key features of the plan.
Undergraduate loan payments cut in half
Under the proposal, borrowers on IDR plans would need to pay 5% of their discretionary income (defined as income above 225% of the federal poverty guideline if the proposal passes, up from 150%) on undergraduate loans, down from 10%.2 This would be half the rate charged today on even the most generous IDR plans, including the current iteration of REPAYE. Borrowers with only grad school loans would still pay 10%, and people with loans for both undergrad and graduate studies would pay between 5-10%.1
$0 monthly payments for low-income borrowers
Under the new plan, the monthly payment would be $0 for single borrowers earning less than $30,500 and any borrower in a family of four earning less than $62,400.3 What’s more, interest wouldn’t accrue on balances for federal student loan borrowers who qualify for $0 monthly payments.4
No interest accrual while making regular payments
Speaking of interest accrual, the new proposal would eliminate additional interest after a borrower’s monthly payment is applied. A borrower would see their monthly payment applied first to interest, but then if the payment isn’t enough to cover that amount, any remaining interest would be waived.1
This is great news for anyone under the current plan who sees their loan balance continue to grow even after they make full, on-time payments. This can happen when the monthly payment a borrower can afford is lower than the interest accrued on their loan. The Education Department estimates that this has happened to about 70% of borrowers on existing income-driven repayment (IDR) plans.1
Auto-enrollment for at-risk borrowers
Many people struggle to keep up with their loan payments and then end up in default, even if they would have qualified for a lower payment with an IDR plan. But with the Department of Education’s new proposal, people who are at least 75 days behind would automatically be enrolled into the IDR plan that gives them the lowest monthly payment. (So long as the department has the approval to get borrowers’ income information from the IRS.)1
A fairer path to student loan forgiveness
The proposal from the White House would remove many of the obstacles toward loan forgiveness that people face today.
Reducing time needed for eligibility
Today, people on the REPAYE plan can have their balances forgiven after 20 years of monthly payments for undergraduate loans or 25 years for graduate or professional study loans. But Biden’s proposal would offer forgiveness eligibility based on how much they originally borrowed. For example, if you borrowed $12,000 or less, you’d be eligible for loan forgiveness after making 10 years of payments. And with every $1,000 borrowed above $12,000, one extra year of payments would be added before you could become eligible for forgiveness.3
Giving borrowers credit for certain deferments
Currently, if you experience economic hardship, you can qualify for a deferment on an IDR plan and keep your progress toward forgiveness. But as of now, that’s the only deferment category that won’t cause you to lose your progress toward forgiveness. Biden’s new proposal would allow people who enter deferment for other reasons, like military service or cancer treatment, to still earn credit for payments toward forgiveness, too.1
Keeping progress toward forgiveness when consolidating loans
Many student loan borrowers wind up consolidating loans to lower their payments in the short term. But this often means that they owe more in the long run.5 What’s worse is that, under the current REPAYE program, people who consolidate also wipe out their progress toward loan forgiveness.5 The proposed changes would let people consolidate their student loans without having to completely reset the forgiveness clock.
The new proposal released by the White House is currently out for 30 days of public comment, and the administration says it hopes to begin implementing the policy later this year.2 The relief would be welcome news for so many people who have found themselves stuck with student loan debt, even while making regular, on-time payments. Talk to your financial professional to understand how these changes would affect you and learn more at ed.gov.
Things to consider
Review the proposed changes at the Department of Education’s website.
Contact your student loan servicer to understand how your payments may be impacted.
Talk to a financial professional about how you can use the money you may soon be saving on loan payments.
1“Fact Sheet: Transforming Income-Driven Repayment,” Ed.gov, accessed January 2023
2“New Proposed Regulations Would Transform Income-Driven Repayment by Cutting Undergraduate Loan Payments in Half and Preventing Unpaid Interest Accumulation,” Ed.gov, January 2023
3“President Biden Just Announced Updates to Student Loan Repayment,” CNBC.com, January 2023
4“Biden Administration Plans to Ease Rules for Income-Based Student-Loan Forgiveness,” WSJ.com, January 2023
5“Five Things to Know Before Consolidating Student Loans,” StudentAid.gov, accessed January 2023
The information provided is for educational purposes only and should not be construed as insurance, securities, ERISA, tax, investment, legal, medical or financial advice or guidance. Please consult your personal independent professionals for answers to your specific questions.
