While millions of federal student loan borrowers are eagerly awaiting to see if the supreme court allows President Biden to fulfill his promise of forgiving as much as $20,000 in debt per student, the Department of Education has silently released the details of a new student loan repayment plan – one that could be just as beneficial for borrowers going forward. In this post, we’ll explain how Biden’s new student loan plan would work and what advantages it offers over the existing repayment plans.
What Is the New IDR Plan?
On January 10, 2023, Secretary of Education Miguel Cardona announced the long-awaited details of a new IDR student loan repayment plan. “IDR” stands for income-driven repayment. This is essentially a way for borrowers to change the terms of their federal student loans based on income and family size. To say it another way, monthly payments will be based on the amount of income they have available rather than how much they owe.
There are currently four different IDR plans available to federal student loan borrowers. Unfortunately, these plans have received a lot of criticism over the years for being too complicated and denying too many applicants. Revamping this program was one of the major agenda points for the Biden administration as outlined in the president’s historical August 24, 2022 speech (where it was first announced that up to $20,000 of student loan debt would be canceled).
Technically, this new IDR plan would actually just be an update to one of the current IDR plans called REPAYE. REPAYE stands for “Revised Pay As You Earn”. Ideally, if this new repair program is adopted and well received, then the Department of Education may eventually retire the other three options.
How the Proposed IDR Plan is Different
There are many things about the new repayment program that would make it superior to the current ones. Below are the major highlights.
Payments Will Be Reduced to 5 Percent of Discretionary Income
Right off the bat, anyone enrolled in this new IDR plan would see their monthly payments cut by at least half. Under the terms of the current plan, payments are limited to 10% of the borrower’s discretionary income. However, the new proposal would reduce this amount to just 5% of discretionary income.
This new 5% rule would only apply to loans for undergraduates. Those borrowing for graduate school would still have to pay the current 10% amount.
Discretionary Income Threshold Increased to 225 Percent
When the government says “discretionary income”, how do they determine this? Under the current plan, discretionary income is defined as the borrower’s earnings (based on their AGI or adjusted gross income) minus 150% of the federal poverty guideline.
Under this new proposal, this calculation would be revised to 225% of the federal poverty guideline. This increase would shield more of a borrower’s income resulting in less of their earnings counting as discretionary income. Since payments are based on discretionary income, a lower amount would mean a lower payment.
In an interview with CNBC, higher education expert Mark Kantrowitz gave some examples of how much this could benefit federal borrowers. For instance, someone who made $40,000 a year would have previously had to pay around $151. However, under this new plan, that payment would now only be $30.
This would especially be a victory for low-income and entry-level earners. Someone making $32,800 a year would effectively have no discretionary income. Therefore, their required monthly payment would be $0.
Loans May Be Forgiven After 10 Years
Aside from lower monthly payments, one of the lesser-known benefits of the IDR plans is that eventually any remaining loan balance is forgiven. Under the current plan, this happens after 20 to 25 years of consistent payments (depending on which of the IDR plans you qualify for).
Under the new terms, anyone with an original loan balance of $12,000 or less would now qualify to have the remainder of their debt forgiven after just 10 years of payments. Those borrowers who applied for more than $12,000 would have an extra year added to their schedule for every additional $1,000 above this amount.
Accrued Interest Does Not Have to Be Paid
One of the negatives of the current IDR plans is that even though the payment is smaller, the borrower is still technically on the hook for all of the interest that accrues on the unpaid balance. This is a lot like when someone makes the minimum payment on their credit card but the outstanding balance grows larger with interest.
Thankfully, under the new proposal, this will be a non-issue. Interest will be subsidized.
Automatic Enrollment for At-Risk Borrowers
Currently, when a borrower is in default on their federal student loans, they have to take action to contact the Department of Education and seek out other alternatives such as enrolling in an IDR plan or another method.
Under the new proposal, rather than waiting or letting borrowers fall too far behind, they will now be automatically enrolled in REPAYE. This will happen after 75 days of missed payments.
When Can I Enroll in This New IDR Plan?
If this new IDR plan sounds like something you’d like to switch to, then unfortunately you’ll have to wait. For now, this new plan is just a proposal. The Department of Education is giving the public 30 days to respond to the terms it’s laid out, and they may make some adjustments depending on that feedback.
Assuming all goes well and it doesn’t meet any legal challenges (like the $20,000 debt cancellation is currently facing), then the White House estimates this new IDR plan could go into effect sometime later this year. However, Kantrowitz believes the more likely scenario is that we won’t see it go active until 2024.
Student Payments Will Resume
Don’t forget – federal student loan borrowers will eventually have to start making payments again. They’ve been frozen since March 2020 as a way to provide relief throughout the COVID pandemic. For now, they’re supposed to resume at the end of June 2023. However, given the turmoil with the Biden administration and their student loan cancellation effort, there’s always the possibility that this deadline may get extended again.
In the meantime, the best thing you can do is to prepare. If you’re not budgeting your money already, then get a helpful app like Buxfer. Buxfer connects to over 20,000 different banks and credit cards so that you’ll always have a real-time report of how much you’re spending. This will help you to do a better job of staying on track and not falling behind on your student loan payments.
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