Student loan repayment plan proposed by Biden could cut monthly bills in half, with some borrowers paying $0

The new draft rules from the Education Department would apply to the Revised Pay As You Earn, or REPAYE, income-driven repayment (IDR) plan. Borrowers on this repayment track make monthly payments based on their income and family size, and any remaining debt is forgiven after 20 to 25 years.

Under the proposed changes, monthly payments would decrease for many borrowers and they would reach forgiveness sooner. Many of the poorest borrowers would not have to pay anything, while all others with undergraduate loans would see their payments cut in half.

The Department of Education is calling the new program “the most affordable income-driven repayment plan that has ever been made available to student loan borrowers.”

The Biden administration publicized these anticipated changes last August, when the president announced his widespread forgiveness program, which would cancel $10,000 to $20,000 in student loan debt for most borrowers. Tuesday’s announcement gives more details on the proposed changes than was previously available.

While the changes to the IDR program can move ahead, Biden’s widespread student loan forgiveness plan is tied up in legal challenges. The Biden administration and challengers are preparing their case for oral arguments at the U.S. Supreme Court, which should take place in February.

The changes to REPAYE are not contingent on the one-time forgiveness effort, and it is well within the Education Department’s purview to change loan repayment plan options. This is a separate effort that will apply to current and future borrowers going forward.

“While most of the Biden administration’s student debt relief initiatives have been one-time adjustments, this new plan is a step toward providing ongoing relief to cash-strapped borrowers,” says Laurel Taylor, CEO and founder of Candidly, a student debt and savings optimization platform. 

Education experts view changes to the REPAYE program as potentially more transformative for borrowers than Biden’s one-time forgiveness effort. Here are some of the highlights so far.

What is an IDR plan?

An income-driven repayment plan is a popular form of repayment for federal student loan borrowers. It allows a borrower’s monthly student loan bill to be based on their annual income and family size, and the amount is recalculated each year to take into account any changes.

Remaining debt is forgiven after a certain number of years (typically 20 to 25). IDRs have become much more popular in recent years than they used to be, with around 8 million borrowers currently enrolled.

Confusingly, though, there are multiple types of IDR plans, with different repayment requirements and forgiveness dates. The proposed changes would simplify these options, with the Education Department “phasing out” new enrollments into the Pay As You Earn (PAYE) and Income-Contingent Repayment (ICR) plans currently offered. It would also limit circumstances for when borrowers can switch into the Income-Based Repayment (IBR) plan.

If you find all of these acronyms and repayment plan names confusing, well, that’s exactly why they need to be simplified.

“The borrowers we assist often arrive for help in tears over the level of frustration and difficulty in the experience of discovering, selecting, and enrolling in a plan,” says Taylor. “It shouldn’t take a PhD in mathematics and six months of a borrower’s life to figure out which plan to enroll in, and then find their way to a fax machine.”

How will the new repayment plan work?

Under the current REPAYE plan, borrowers pay 10% of their discretionary income toward their debt each month. Currently, discretionary income is defined by the Education Department as “income in excess of a protected amount set at 150% of the Federal poverty guidelines.”

The proposed rules would change the definition of discretionary to protect more of a borrower’s income, bumping it up 225% of the Federal poverty guidelines. That’s the equivalent annual income of earning $15 per hour, according to the Education Department. It would also cut payments to 5% of income, rather than 10% (those with graduate school debt would still pay 10%).

How does that shake out? Under the current repayment scheme, a single borrower starts making payments on their debt on income above $20,400. The proposed rules would increase that so that payments begin on income above $30,600.

Compared to the current REPAYE plan, the Education Department estimates the changes will lead to a 40% decline in how much the average borrower pays during their lifetime (as more debt will be forgiven). It would help the lowest-earning borrowers significantly more, reducing the average lifetime payments of those in the lowest 30% of earners by 83%.

According to Candidly, a borrower earning $55,000 per year with a loan balance of $45,000 would pay around $500 per month on a standard repayment plan, and $345 per month on one of the current IDR plans. Under the proposed changes, that same borrow could pay just over $100.

Any other significant changes?

The Biden administration is also taking steps to stop interest accrual from ballooning balances. Under the proposed rules, a borrower can have their monthly payment applied to their interest first; if the payment is not enough to completely cover the amount owed, no additional interest will be charged. That will be a relief to those who are making payments each month but still can’t seem to get ahead of their debt.

Additionally, the proposed rules would change how long it takes certain borrowers to receive forgiveness. Right now, every borrower qualifies for forgiveness after 20 to 25 years, regardless of their balance or degree type. This would be changed so that those who borrow $12,000 or less would receive forgiveness after making 10 years of payments.

After that, each additional $1,000 adds a year of monthly payments that must be made, maxing out at 20 years for undergraduate loan holders or 25 years for graduate loan holders.

This will especially be helpful to those who attended community college, according to the Biden administration.

The Education Department is also proposing counting more periods of deferment or forbearance toward the total number of payments needed for forgiveness. For example, deferments and forbearances related to cancer treatments, military service, national service, National Guard duty, among others, would count toward the total number of payments needed.

Another big change: progress toward forgiveness would not fully reset after a borrower consolidates their student loans, as it currently does.

Who qualifies?

Most borrowers with federal undergraduate and graduate loans qualify for the new plan (although there are slightly different timelines for forgiveness and income).

There is one exception: Those with Parent PLUS loans are not eligible for the REPAYE track.

The Education Department says it believes the new REPAYE plan will be the “best option” for all borrowers who qualify going forward, given its significantly lower monthly payment rate.

When will the changes take effect?

Right now, it is unknown when (and with 100% certainty if) the draft rules will be finalized by the Biden administration and put into place, though the Education Department said it plans to finalize them and start implementing some provisions “later this year.”

Starting on Jan. 11, there will be 30 day public comment period for the new regulations on Regulations.gov, where interested parties can submit opinions on the draft rules.

All of that said, the changes may be harder to implement than the Biden administration previously anticipated: funding for the Office of Federal Student Aid will not increase next year to help make the changes, as the administration requested.