Federal student loan borrowers could soon see their monthly payments reduced by at least half and possibly have their debt forgiven within a decade. This is due to major changes that the Education Department intends making to one of its existing repayment programs.
Mid-January brought out more details about the revised income-driven payment plan. The Biden administration plans to make changes to the IDR plan (known as REPAYE) by the end 2023. This is the latest attempt by President Biden, to reduce the national debt load of $1.76 trillion.
Scott Stark, a certified Financial Planner at Financial Finesse (a workplace financial wellness organization), says that there are many steps to get the plan in place.
Some borrowers will feel the impact more than others. The most borrowers will benefit are those who make the least relative to the amount they owe. IDR plans limit monthly payments to a percentage of the borrower’s income. Any balance remaining after payments are made for a specified number of years is forgiven.
Experts have identified five beneficiaries to the new IDR plan.
1. Borrowers who went to college but did not graduate
People who borrowed student loans to attend college but did not finish can find themselves in difficult financial situations. They have lower loan balances but they don’t have the 66% increase in income that college graduates enjoy compared to graduates of high schools with some college. This is according to 2017 data from Economic Policy Institute, a progressive think-tank.
A revised IDR plan may be of assistance: Borrowers who borrowed $12,000 or less from student debt will have their balance forgiven after 10 consecutive years of qualifying monthly payment, instead 20 to 25 years as per existing plans.
According to an Urban Institute analysis, 51% of student debt below $10,000 is owed by people who did not earn a bachelor’s. Even $0 monthly payments would count towards the 10-year forgiveness.
Mike Pierce, executive director of the Student Borrower Protection Center and co-founder, says that “the administration is really looking after people who tried college but it didn’t work for them.”
2. Borrowers who live in high-cost areas
IDR plans limit monthly student loan payments to a percentage of a borrower’s discretionary income. Currently, this is your household income minus 150% federal poverty guidelines for your family size. Your discretionary income and household income for a family with four members in Virginia is $75,000, which is $75,000 for a family that has four members. The monthly payments are based on this percentage. Current IDR plans pay a percentage of that $30,000.
This revised plan will reduce your income by 225% of federal poverty guidelines, allowing you to shelter more of your earnings. The $75,000 household would receive payments based only $7,500 of discretionary income. In addition, undergraduate loan payments would not exceed 10% of discretionary income under current plans. This would reduce the monthly payments of this household to $250, rather than $250.
This is a significant change for borrowers who reside in expensive areas where housing and food costs further reduce discretionary income. Betsy Mayotte is president and founder of The Institute of Student Loan Advisors.
3. Borrowers at high risk of defaulting or delinquent student loans
Although it may seem counterintuitive at first, borrowers with small balances have “extraordinary” default and delinquency rates, according to Dominique Baker, Southern Methodist University associate professor of education policy. This is true even for borrowers who did not complete college. The default rate for borrowers without a degree is three times that of borrowers with a diploma according to Education Department data.
Borrowers who are in default will be allowed access to the revised IDR plan. This will allow them to make more affordable monthly payments, and eventually forgive their loans. Student loan borrowers who are in default are currently blocked from any IDR plans.
A second perk is that borrowers who are not paying their bills within 75 days of the due date will automatically be enrolled in the new IDR plan. This could help struggling borrowers avoid student loans default. If they lose their job, earn less than $32,800 per annum as a single tax filer, or less $67,500 for four members of a family, they will be eligible for $0 monthly payments under this revised plan.
4. Borrowers who are unable to pay all of their monthly interest
The days of ballooning student loan balances may be gone
The revised plan would cover any unpaid interest each month provided the borrower continues to make their monthly payments. Restricted interest would not accrue.
Daniel Collier, assistant professor of higher education and adult education at University of Memphis, who studies IDR plans, says that people will see their balances decrease every month. It will likely have the largest psychological impact on high-debt borrowers. ”
5. Borrowers in color
Black, Hispanic and American Indian borrowers would have lifetime payments per $1 borrowed that are 50% lower than the current REPAYE plans. White borrowers, on average, would have lifetime payments per $1 borrowed that are 37% lower than the current REPAYE plans.
These estimates are influenced by racial income gaps. According to data from 2015-2019 U.S. Census, Hispanic households have 75% and 64% respectively, while Alaska Native and American Indian households make 64% and 61%, respectively.
“Black borrowers are more likely than other borrowers to borrow, and they are more likely borrow more and to have trouble repaying their loans. So things that improve student debt management are more likely help those who are most hurt,” Victoria Jackson, assistant director for higher education policy at The Education Trust (a non-profit organization that promotes economic and racial equity in higher education), says.
Who will not benefit from the new IDR.
Parents who borrowed money to send their children to college
The revised IDR plan would exclude parents who borrowed federal loans to pay college costs for their children — also known as Parent PLUS loans. These borrowers can only be eligible for income-contingent repayment, the least generous of the four IDR options.
Tisa SilverCanady, who is a doctorate student and founder of the Maryland Center for Collegiate Financial Wellness, says that “that’s especially a concern for Black households.” According to The Century Foundation, a left-leaning think-tank that studies equity in education and health care, 42% of Black Parent PLUS borrowers were poorer than 8% of white Parent PLUS borrowers.
Graduate School Debt Borrowers
Graduate school borrowers who borrowed federal loans would see their payments shrink but would receive a smaller boost under the IDR revision.
Only graduate school loans would mean that borrowers would still have to pay 10% of their monthly discretionary income, which is the current IDR, as opposed to 5% for undergraduate loans. Between 5% and 10 %.
How do I sign up?
The updated IDR plan is still not available. Although the Education Department hopes to launch it before 2023, due to a budget crunch as well as a long list of tasks, this timeline is not yet available.
Before the new plan is implemented, federal student loan payments may be resumed. Talk to your student loan representative about the various payment options available.
Borrowers currently enrolled in REPAYE plan will automatically be transferred to the new plan once it becomes available. To sign up, most other borrowers will need contact their servicer.