The Education Department has released long-awaited details on a piece of President Joe Biden’s student loan debt plan that would enable millions of borrowers to cut their monthly federal payments by more than half — perhaps the most consequential component of the president’s broader initiative to make the loan system more manageable.
The Education Department’s proposed rules, released January 10, would revise one of its existing income-driven repayment plans — known as REPAYE — in which borrowers’ monthly payments are tied to their income and family size, and after a set number of years, any remaining debt is forgiven.
Unlike Biden’s one-time initiative to cancel up to $20,000 in federal debt, which has been stymied by legal challenges, the new repayment plan would become a permanent fixture of the student loan infrastructure and apply to current and future borrowers.
The latest iteration of REPAYE will be the most affordable of the five existing plans, the first of which became available in 1995. Like the others, it doesn’t do anything to slow the rising cost of higher education, instead providing a new way to cope.
A significant and rising share of borrowers is already enrolled in income-driven repayment, or IDR, plans, which are designed to ease the pressure when debtors can’t afford their monthly bill. Roughly 8.5 million federal student loan borrowers are enrolled in existing plans, representing about one-third of all borrowers in repayment, up from 1.6 million, or 10%, in 2013.
It’s still unclear when the new plan will be up and running: The proposal will be subject to public comment for 30 days, and the administration will take that feedback into account before the rule becomes final later this year.
Here’s how it’s expected to work, with updates to follow as we learn more.
Who is eligible for the new IDR plan?
Borrowers with federal undergraduate loans or graduate loans.
But undergraduate borrowers are eligible for lower payments than graduate borrowers.
Who is excluded?
Parents who borrowed to pay for their children’s schooling using Parent PLUS loans cannot enroll in the new plan.
That means if parent borrowers cannot afford to make their payments, they generally have access only to the most expensive income-driven repayment plan — known as income-contingent repayment, or ICR — which requires borrowers to pay 20% of their discretionary income for 25 years; anything remaining is forgiven.
Does this updated plan mean others will shut down?
Yes.
In the past, new repayment plans didn’t lead to the shuttering of older ones, which is why there’s a confusing assortment of options on the books. (The amended REPAYE plan is generally more affordable than the four other existing plans, including PAYE, ICR and IBR, which comes in two versions.)
But the Biden administration said it wanted to simplify the choices so that borrowers weren’t overwhelmed: It proposed phasing out new enrollments into the Pay as You Earn (PAYE) and income-contingent repayment (ICR) plans, while limiting the circumstances where a borrower can later switch into the income-based repayment (IBR) plan.
Borrowers with Parent PLUS loans, however, will not lose access to the ICR repayment plan, according to senior administration officials. They can continue to enroll in that plan after they consolidate into a so-called direct consolidation loan.
How does the new IDR plan work?
First, some quick background: All income-driven plans generally operate in the same fashion. Payments are calculated based on your earnings and household size, and are readjusted each year. After monthly payments are made for a set number of years — usually 20 — any remaining balance is forgiven. (The balance is taxable as income, though a temporary tax rule exempts balances forgiven through 2025 from federal income taxes.)
The revised REPAYE plan would become more generous in several ways.
To start, it would reduce payments on undergraduate loans to 5% of discretionary income, down from 10% in the existing REPAYE plan (and 15% in other plans).
Graduate debt is also eligible, but borrowers would pay 10% of discretionary income on that portion. If you hold both undergraduate and graduate debt, your payment will be weighted accordingly.
But the new rules also tweak the payment formula so that more income is protected for a borrower’s basic needs, which in turn reduces payments overall. That change will also allow more low-income workers to qualify for zero-dollar payments.
What is discretionary income?
Once you pay for basic needs like food and rent, any leftover income is considered discretionary income. In the land of federal student loans, income-driven repayment plans require borrowers to pay a percentage of their discretionary income.
The proposed plan tweaks the payment formula so that more income is protected, generating less discretionary income and a lower payment.
Here’s how. In the current REPAYE program, discretionary income is defined as income in excess of a protected amount set at 150% of the federal poverty guideline. It’s not much. That means single borrowers start making payments on income above roughly $20,400 (or just above $41,600 for a family of four).
The revised REPAYE plan would increase the amount of income protected from repayment to 225% of the federal poverty guidelines. That means no worker earning under 225% of the poverty level — or what a $15 minimum wage worker earns annually — will have to make a payment, the administration said.
Put another way, a single borrower who makes less than $30,500 would make $0 monthly payments. The same goes for a borrower in a household of four with income below $62,400.
Are there any changes for borrowers with small loan balances?
Yes. People who took out smaller loans — or those with original balances of $12,000 or less in total — would make monthly payments for 10 years before cancellation, instead of the more typical 20-year repayment period. Every additional $1,000 borrowed above the $12,000 amount would add one year of monthly payments before the balance is forgiven.
Will the way interest is treated change?
Yes. Unlike other existing income-driven plans, borrowers’ loan balances will not grow as long as they make their monthly payments, even when they are not required to make any payments because their income is too low.
In the proposed plan, if a borrower’s payment isn’t high enough to cover the interest due that month, the remaining interest will not be charged or tacked onto the balance.
That will be a huge relief to borrowers who diligently make payments yet still see their balances balloon over the decades because they’re not paying enough to cover the interest owed.
How much will my payment decrease under the new plan?
Undergraduate borrowers will receive the most significant savings, though graduate borrowers will benefit, too.
Borrowers who rank among the bottom 30% of earners (or families with earnings less than $29,000 on average) would qualify for payments that are 83% lower per dollar borrowed over their lifetimes, on average, according to the Education Department, while those in the top 30% of earners (families with earnings exceeding $90,000) would see only a 5% reduction.
A single borrower with an income below $30,500 per year would not be required to make any monthly payments — nor would a borrower in a household of four with income below $62,400.
Will my spouse’s income be included in my payment calculation?
It depends on how you file your federal income tax return.
Married borrowers who file their federal income tax return separately would be permitted to exclude their spouse from both their household income and family size. But joint filers must include any income earned by their spouse.
The department has proposed applying this rule to all income-driven repayment plans, not just the revised REPAYE program, to lessen confusion and simplify the application process.
Can delinquent borrowers enroll?
The proposed rule change would automatically enroll borrowers who are at least 75 days behind on their payments into a plan that will provide the lowest payment.
This proposed change would apply to borrowers for whom the Education Department has approval to get their income information from the Internal Revenue Service.
What if my loans were in default?
For the first time, borrowers in default would be permitted to enroll in an income-driven repayment plan.
But there’s a catch: The proposed rule would only permit defaulted borrowers to enroll in the IBR plan, which has higher payments than the new REPAYE program.
Can I enroll in the new plan before loan payments are set to resume?
That’s hard to predict with any certainty, but probably not. It’s not yet clear when the new program will be ready for borrowers or when payments will resume. And even after the revised plan’s rules are finalized, the loan servicers and Education Department will still have to update their systems.
“But the Department has perhaps made it easier for itself and for borrowers by amending the terms of an existing plan — the REPAYE plan — rather than creating a totally new plan as it previously proposed,” said Abby Shafroth, a lawyer at the National Consumer Law Center who focuses on student loan issues. “As a result, it can work from the existing REPAYE architecture, and borrowers who are already enrolled in REPAYE won’t have to change plans.”
Student loan payments have been on hold for most federal borrowers since March 2020 as part of a pandemic relief measure. The Biden administration has said that the payment pause would continue until the Education Department is allowed to move ahead with its debt cancellation plan or the litigation is resolved. But if those matters have not been settled by June 30, payments will resume 60 days after that. Borrowers will be notified in advance.
Will anyone be automatically enrolled in the revised plan?
Yes. Borrowers who are already enrolled in the existing REPAYE plan won’t have to change plans.
Can I switch from another repayment plan to the revised one?
Eventually, yes.
<b>Will my repayment clock restart if I switch plans?</b>
No, borrowers generally receive credit when they switch from one income-driven plan to another.
What should I do in the meantime?
If you can’t afford the standard payment plan, you should probably consider one of the existing income-driven repayment plans, including REPAYE: Borrowers in this plan would benefit from lower payments after the revised program replaces the existing one.
Other repayment options may better suit your circumstances, and they can sometimes yield lower payment amounts. Those include the standard (with fixed payments), graduated (your payments rise) and extended (you pay over a longer time) repayment plans.
Options that pause payments should generally be used as a last resort: Requesting a deferment or forbearance will temporarily postpone payments, but there can be significant added costs in the long run.
I’m still confused. Where can I get more help?
There are tools and services that can help. The loan simulator tool at StudentAid.gov will guide you through the existing options and help you decide which plan best fits your goals — finding the lowest-payment plan, for example, versus paying loans off as soon as possible.
The tool is easy to use. When you sign into your Student Aid account, it should automatically use your loans in its calculations. (You can manually add other federal loans if any are missing.) You can also look at plans side by side to compare how much they’ll each cost over time, both monthly and in total, and if any debt would be forgiven.
Besides your loan servicer, groups like The Institute of Student Loan Advisors, known as TISLA, can provide free guidance on what options may work best for you. For New York state residents, EDCAP, a nonprofit organization focused on student loans, also offers help. And some employers and other organizations have hired companies like Summer, which helps borrowers sort through the options.
c.2023 The New York Times Company. This article originally appeared in The New York Times.
