Biden proposes student loan plan that could save borrowers thousands. What to know
A new proposal from the Department of Education could save borrowers thousands in student loan payments, officials say.
The regulations revise an existing income-driven repayment plan and would determine a borrower’s monthly payments based on their income, providing relief especially for low- and middle-income households. Originally announced in August alongside Biden’s student debt forgiveness plan, the department released more details Tuesday, Jan. 10.
Under the newly announced guidelines, single borrowers earning less than $30,600 per year and a borrower in a household of four with an annual income of less than $62,400 would have a $0 monthly payment on their student loans, according to the department.
All other borrowers who have undergraduate loans and enroll in the program would see their payments cut in half.
The plan also stops the accumulation of interest payments, preventing a borrower’s balance from growing as they make payments.
“We cannot return to the same broken system we had before the pandemic, when a million borrowers defaulted on their loans a year and snowballing interest left millions owing more than they initially borrowed,” United States Secretary of Education Miguel Cardona said in a statement.
The new regulations come as Biden’s student loan forgiveness plan remains blocked by courts and awaits review from the Supreme Court. The Department of Education stopped accepting new applications for relief in November, and the administration extended its payment moratorium through June.
“These proposed regulations will cut monthly payments for undergraduate borrowers in half and create faster pathways to forgiveness, so borrowers can better manage repayment, avoid delinquency and default, and focus on building brighter futures for themselves and their families,” Cardona said.
Here’s what else you should know about the latest proposal.
Saving thousands on student loan payments every year
The latest plan overhauls the existing revised ”pay as you earn” (REPAYE) plan, which gives borrowers the opportunity to follow monthly payments that are equal to 10% of their discretionary income divided by 12.
Under the REPAYE plan, discretionary income was considered any income “in excess of a protected amount set at 150 percent of the Federal poverty guidelines.” This left low- and middle-income borrowers responsible for unattainable payments, according to a department fact sheet about the new regulations.
The proposed regulations change this standard, instead considering protected income to be 225% of the federal poverty guidelines.
“This would help protect more borrowers from having to choose between making a loan payment and covering basic needs, such as paying rent or buying groceries,” the department said.
Furthermore, the plan stops interest accumulation. Under the existing REPAYE plan, borrowers can have at least half of unpaid interest forgiven or waived each month, the department said.
Some borrowers already enrolled in an income-driven repayment plan see their balance grow despite making payments. This happens when they’re paying less each month than the interest accruing on their loan.
Under the revised plan, however, if a borrower’s determined monthly payment is not sufficient, the interest cost will not be charged.
The department estimates these changes will save the typical graduate of a four-year public university about $2,000 a year and said lifetime payments per dollar borrowed would drop by an average of 40% for future borrowers.
Quicker forgiveness for some borrowers
The proposed rules also aim to help borrowers make quicker progress toward forgiveness, providing provisions specifically for borrowers with smaller balances.
Under the existing REPAYE plan, borrowers receive forgiveness after 20 or 25 years of payment dependent on the type of loan, regardless of their balance. According to the department, this might inhibit borrowers with small balance, especially community college borrowers, from enrolling in income-driven plans.
Now, the department wants to shorten the time frame for forgiveness for borrowers who took out $12,000 or less in student loans.
Instead of 20 years, the new proposal would grant these borrowers forgiveness after “making the equivalent of 10 years of payments,” according to the fact sheet.
For those who have loan balances of over, $12,000, every extra $1,000 would add a year of monthly payments before it is forgiven.
The department estimates this change would leave 85% of community college graduates debt free within 10 years of entering repayment. Furthermore, lower balance borrowers who have a high risk of defaulting will be encouraged to enroll in a repayment plan, the department said.
The new program would also automatically enroll delinquent borrowers and offer default borrowers access to an income-driven repayment plan.
Ongoing concerns about the cost of relief
The new regulations have received mixed reviews.
Following the department’s announcement, the Student Borrower Protection Center’s Deputy Executive Director, Persis Yu, called the proposal “a remarkable shift.”
“For nearly three decades, IDR has failed to live up to its promise of an affordable lifeline for federal student loan borrowers. Instead, the program perpetuated an inescapable debt trap–leaving millions of borrowers vulnerable to devastating collection tools,” Yu said in a statement.
“By canceling any unpaid interest each month, reducing monthly payments, and providing access to defaulted borrowers, the Biden Administration has begun to deliver on the original promise of IDR,” according to Yu.
Some experts argue the plan will effectively make low-value degrees free for students but pricey for taxpayers. The department said it estimates the cost of the new repayment plan to be about $138 billion.
Those who oppose the new program also argue that under the new regulations, more students will be encouraged to take out loans, making debt a norm in higher education.
“For most undergraduate students, it will be rational to borrow the maximum possible amount from the federal government. You’re leaving money on the table otherwise,” Preston Cooper, senior fellow at The Foundation for Research on Equal Opportunity tweeted.
In other words, students who otherwise would not have a reason to take out student loans could be incentivized to take loans under the new plan.
The proposed changes would reduce the cost of college by offering students loans instead of lowering tuition costs, according to Adam Looney, nonresident senior fellow at the Brookings Institute.
“The changes mean that most undergraduate borrowers will expect to only repay a fraction of the amount they borrow, turning student loans partially into grants,” Looney wrote in September after the plan was initially introduced. “When those students are offered a substantial discount by paying with a federal loan, they will borrow billions more each year.”
What happens next?
The regulations are not finalized yet.
The department said it will submit the full list of proposals to the Federal Register on Wednesday, Jan. 11, which begins a 30-day public comment period.
After public comments are accepted, the department will review the public’s input before finalizing the rules later this year. It said it aims to start implementing provisions before the end of 2023.
This story was originally published January 10, 2023 at 2:35 PM with the headline "Biden proposes student loan plan that could save borrowers thousands. What to know."
