Student loan forgiveness has captured the attention of millions of Americans, as they wait to see how the Supreme Court will rule on the Biden Administration’s plan to forgive up to $20,000 of federal debt per borrower.
But while loan forgiveness has been in the spotlight, many student borrower advocates are also waiting on details on a separate overhaul tucked into the White House's three-part debt relief plan. The proposed — and much less talked about — new income-driven repayment plan could provide help to millions of low- and middle-income student loan borrowers.
“Debt forgiveness is taking up a lot of space right now in the conversation,” says Jill Desjean, senior policy analyst for the National Association of Student Financial Aid Administrators (NASFAA). “It’s not shocking that would take priority in the media over this more subtle change.”
About 30% of all student loan borrowers are enrolled in the current income-driven repayment plans, which set monthly payments based on a borrower's income and family size. But many borrowers have difficulty accessing the existing plans, and once enrolled, some borrowers still struggle to pay and fall behind on their debts. A new, improved plan would help not just current borrowers but future ones as well.
That’s why Education Secretary Miguel Cardona said in the fall that he was "more excited about" upcoming changes to income-driven repayment than the one-time loan forgiveness.
When the proposal was announced in August, the administration said it would release more details "in the coming weeks." But that hasn't happened yet, and the final plan could look very different by the time it takes effect. Still, if the details we do know so far are implemented, the result would be a much more generous repayment plan.
Here’s what to know about the new income-driven repayment plan so far.
1. More income will be protected from payments
One big change under this potential new IDR plan is that more of a borrower's income will be shielded from the formula that determines how much the borrower owes each month.
Payments under income-driven repayment plans are based on the borrower’s "discretionary income." Right now, most of the IDR plans define that as the difference between your annual income and 150% of the poverty guideline for your family size and state of residence.
"So if you earn less than that amount, your payment is zero," Desjean says. If you earn more, your payments could still be significantly lower than they would be under the standard 10-year repayment plan.
This new proposed plan would raise the amount of income that’s considered non-discretionary by increasing the threshold to 225% of the federal poverty level. For a single borrower, that’s equal to a salary of about $30,558 this year — or roughly the equivalent of a $15 an hour job, according to the administration.
"By extending that protected income up to 225% of the federal poverty guideline, you're going to be capturing more people who are still really relatively low-income into that $0 monthly payment amount," Desjean says.
2. Payments could be cut in half for undergrad debt
Another major update is cutting the percentage of discretionary income that goes toward payments. Currently, borrowers have their payments reduced to 10% of their discretionary income on most IDR plans.
However, under the proposed plan, that amount would be reduced to 5% for undergraduate borrowers — "Half the amount that it is right now," Desjean says.
This change, combined with shielding more income from the formula, would dramatically reduce some borrowers' payments. For example, a borrower with a bachelor’s degree earning $32,000 a year could see their monthly payments drop from about $115 to $20, according to calculations from the Urban Institute.
3. Debt would be forgiven earlier for undergrad loans
One of the benefits of income-driven repayment plans is they offer borrowers a road to debt forgiveness after a certain period of time. Right now, time-based cancellation for the existing plans is either at 20 years or 25 years. In other words, if you've been on an income-driven plan and are still making payments after 20 or 25 years because your payments were so low, any remaining balance will be forgiven (and usually subject to income taxes, unlike other forgiveness programs).
Under the new plan, the administration wants to forgive remaining debt after 10 years for undergraduate borrowers with an original balance of $12,000 or less.
"It makes sense," Desjean says. "If you didn't borrow a huge amount, the idea of paying back $12,000 for 20 or 25 years seems unnecessarily long."
The Department of Education estimates that this update will allow nearly all community college borrowers to be debt-free within 10 years.
4. Unpaid interest may be covered by Uncle Sam
One of the criticisms of income-driven repayment is that it can allow balances to balloon, even as borrowers consistently make payments, since some payments are too low to cover the interest that’s accumulating.
In fact, a 2020 report found that the majority of borrowers in these plans fall into this category, known as negative amortization.
“They know they're on this path to eventually qualify for cancellation after 20 or 25 years, but it can be really disheartening to every month make a payment and see your loan balance grow because your payment didn't fully cover your interest,” Desjean says.
Under the current proposal, that problem is fixed; if a borrower’s payment doesn’t fully cover the interest charges, the government will cover the difference so that balances don’t grow as long as payments are being made.
From the details released so far, it's unclear whether the interest benefit would only apply to undergraduate debt, like the shortened timeline to forgiveness, or would also include graduate debt.
Changes are still a long way off
Though this new plan has the potential to help many borrowers, it’s too early to get excited about any specifics. The Education Department still needs to release formal proposed regulations, which then go out for public comment and could go through several rounds of revisions.
“This is all speculation because we don't even have a draft,” said Betsy Mayotte, president and founder of The Institute of Student Loan Advisors (TISLA). “So a whole lot can change.”
The current language is also unclear as to how graduate and parent borrowers will be impacted. “It appears like they're proposing a program that would be for undergraduate loans only, whereas all the other plans are for either undergraduate or graduate loans,” Mayotte noted.
Ultimately, she says, it appears this new proposed plan is intended to address a long-term negative amortization situation for people that have high debt and low income, as well as borrowers who have relatively low debt but are not benefiting from their education.
“The people that have the highest default rate are not people that are six figures in debt,” Mayotte says. “It's the people that owe $10,000 to $20,000 or less, and it’s because they have debt and no degree.”
But as for the final details, we’ll have to wait. It will be well into 2023 before the new plan is implemented, and the plan could face resistance from some Republican lawmakers, who have questioned its price tag. In the meantime, students should not take out debt based on what may happen in the future.