Student loan borrowers could see big changes to the income-driven repayment (IDR) plan.
On Tuesday, the U.S. Department of Education proposed regulations to reduce the cost of federal student loan payments, especially for low and middle-income borrowers.
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If approved, the new plan could cut some student loan borrowers’ monthly payments in half and would prevent interest from accumulating if payments are being made --- even if the payment requirement is $0.
“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,” said U.S. Secretary of Education Miguel Cardona
The regulations are part of the plan President Joe Biden presented when he announced the plan to provide student debt relief to around 40 million borrowers and make the student loan system more manageable.
Student debt relief is currently blocked by the court system. The Supreme Court has agreed to take the case and oral arguments are expected on Feb. 28. A final answer from the Supreme Court is expected by early summer.
Read: Biden administration files brief with Supreme Court in defense of student loan forgiveness
How will the proposed IDR plan help borrowers?
The proposed changes would reduce monthly and lifetime payments.
Officials said these changes would especially help low and middle-income borrowers, community college students, and borrowers who work in public service.
The proposed regulations would amend the terms of the Revised Pay As You Earn (REPAYE) plan to offer $0 monthly payments for any individual borrower who makes less than around $30,600 annually and any borrower in a family of four who makes less than about $62,400.
The regulations would cut in half monthly payments on undergraduate loans for borrowers who do not qualify for the $0 payment plan. The regulations would also ensure unpaid interest does not accumulate if a borrower is making their monthly payments.
Below are the effects officials said the plan will have compared to the existing REPAYE plan:
- Future cohorts of borrowers would see their total payments per dollar borrowed decrease by 40%. Borrowers with the lowest projected lifetime earnings would see payments that are 83% less, while those in the top would only see a 5% reduction.
- A typical graduate of a four-year public university would save nearly $2,000 a year relative to the current REPAYE plan.
- A first-year teacher with a bachelor’s degree would save more than $17,000 in total payments while pursuing Public Service Loan Forgiveness -- a two-thirds reduction in what they would pay in total under REPAYE.
- 85% of community college borrowers would be debt-free within 10 years
- On average, Black, Hispanic, American Indian and Alaska Native borrowers would see their lifetime payments per dollar borrowed cut in half.
Monthly payments cut in half
The program would cap monthly payments for undergraduate loans to 5% of a borrower’s discretionary income -- that’s half the rate that borrowers must pay now under most existing plans (10%).
Borrowers with both undergraduate and graduate loans will pay a weighted average rate, according to CNBC. The White House expects the average annual student loan payment to be lowered by more than $1,000 for both current and future borrowers.
Raise amount considered non-discretionary income
The plan would raise the amount of income that is considered non-discretionary income and protect it from repayment. That means no borrower earning under 225% of the federal poverty level, about the annual equivalent of a $15 minimum wage for a single borrower, will have to make a monthly payment, officials said.
An example the White House gave was that a typical single public school teacher with an undergraduate degree who makes $44,000 a year would only pay $56 a month on their loans -- that’s compared to the $197 they pay now under most income-driven repayment plans.
What is discretionary income? It’s the extra income you have after paying for basic necessities like taxes, everyday expenses and household bills. The federal government calculates this using your state’s federal poverty guidelines and then decides how much you’ll have to pay each month.
Covering unpaid monthly interest
The plan would also cover a borrower’s unpaid monthly interest as long as they make a monthly payment.
That is to ensure that a borrower’s loan balance will not grow as long as they make the required monthly payments. The White House said it will even cover the interest for those with a monthly payment of $0.
Forgiving some loan balances in 10 years of payments
If your original loan balance was $12,000 or less, your balance will be forgiven after 10 years of payments instead of the original 20 years.
The Department of Education estimates that this reform will allow nearly all community college borrowers to be debt-free within 10 years.
Holding institutions, programs accountable for debt
Education officials are also working on a proposed “gainful employment regulation” that would cut off federal financial aid to career training programs that fail to provide financial value.
The regulations would require warnings for borrowers who attend any program that leaves graduates with excessive debts.
“The Biden-Harris Administration is also committed to ensuring postsecondary institutions and programs are held accountable if they leave borrowers with unaffordable debts,” the Department said.
The regulatory package would also include proposals to strengthen the conditions that can be placed on institutions that do not meet the requirements of the Higher Education Act or exhibit signs of risk.
Officials are also taking steps to carry out a plan to publish a list of programs at all types of colleges and universities that provide the least financial value to students. Officials are asking for public feedback to help them identify these programs.
When the list is finalized and published, institutions with programs on the list will be asked to submit plans for improvement.
Public comment period on proposed regulations
The proposed regulations and request for information will be published in the Federal Register on Wednesday (Jan. 10).
The public will be able to comment on both documents online for 30 days. The department expects to finalize the rules and begin implementing some provisions later this year.
Click here to view the Federal Register website.
View documents about the proposed regulations
Officials have released copies of the unofficial proposed IDR regulation, the unofficial copy of the RFI and fact sheets to go with them. Links are blow.