A New Student Loan Plan Could Reduce the Burden for 10 Million Borrowers. Here’s How

On Tuesday, the U.S. Department of Education proposed new regulations that could cut monthly payments for millions of undergraduate borrowers in half.

The changes would affect the existing Revised Pay As You Earn Repayment Plan (REPAYE Plan), which is one of four income-driven repayment plans. Nearly 10 million borrowers are enrolled in an income-driven repayment plan, which uses borrowers’ monthly income and family size to set payments at a more affordable cost.

The plan is the latest attempt by the Education Department to give student loan borrowers relief while Biden’s $20,000 student loan forgiveness program remains in legal limbo. Last year, the Education Department also announced it would enact a one-time account adjustment towards eligible borrowers who were wrongfully steered into forbearance.

But the amendments are not set in stone. The public is encouraged to provide feedback on the regulations in the next 30 days. The Administration will take these comments into account before changes are finalized sometime this year. The Education Department did not provide a timeline for exactly when the changes would take effect. In the meantime, many organizations have praised the suggested regulations.

“The proposed changes to the income-driven repayment program announced today by the US Department of Education address several of the biggest pain points experienced by distressed student loan borrowers,” said Lanae Erickson, Senior Vice President for Social Policy, Education & Politics at national think tank Third Way, in a statement. “We know that the borrowers who are most likely to struggle with repayment are those who did not complete a degree, and they hold lower than average amounts of debt. To that end, we are heartened to see that these proposed regulations target the greatest help to the borrowers who need it the most.”

Here’s what we know about the proposed plan.

How does the new proposed repayment plan compare to the current one?

Income-driven repayment plans were first introduced as an alternative program that would offer borrowers more affordable payment options towards their student loans. But borrowers have long criticized such programs because their overall debt would accrue overtime if their monthly payments were lower than the interest charges.

That is all set to improve under the proposed amendments.

Should the changes be enacted, borrowers who only have undergraduate loans would pay 5% of their discretionary income, down from 10% in the existing REPAYE plan, making this the most generous income-driven repayment program yet.

The changes would also allow borrowers to pay less as part of income-based repayment plans. Current regulations calculate discretionary income (money left over after paying necessary expenses like rent) as the difference between their annual income and 150% of the poverty guideline. Now, that number will increase to 225%, meaning borrower’s will be able to hold on to more of their earnings per month.

That means that borrowers who earn $15 or less per hour won’t have to make any monthly payments towards their student loan debt. Borrowers whose household income is less than $62,400 for a family of four would also not have to make payments under the plan.

The Education Department’s modifications would also ensure interest does not accumulate for those who are making regular, on-time payments. Monthly payments will still first be applied to interest “but if it is not sufficient to cover that amount, any remaining interest would not be charged,” according to an Education Department factsheet.

What does it mean for borrowers?

Borrowers across all racial groups will benefit from the changes, though the Education Department estimates that Black, Hispanic, American Indian, and Alaska Native borrowers are set to see their lifetime payments per dollar borrowed cut by 50%.

About 85% of community college borrowers are also set to be debt-free in the next decade of entering repayment because the Education Department is decreasing the timeframe for receiving forgiveness from 20-25 years to 10 years for those who borrowed $12,000 or less.

To ensure that borrowers are not steered into forbearance—temporarily putting payments on hold—or default, the Education Department is also proposing automatically enrolling borrowers who are 75 days behind on their payments into the least expensive income-driven repayment plan with the lowest payments they are eligible for

Who is eligible for the new plan?

Borrowers who have graduate school loans will not be impacted by the proposed changes, and will keep making the same payments. But borrowers with both graduate and undergraduate loans will pay a weighted average of between 5% and 10% of their discretionary income.

Those with Parent PLUS loans, which are given to the parents of an undergraduate student, are not eligible, much to the dismay of nonprofits like the Student Borrower Protection Center (SBPC). While they praised many of the proposed amendments, the SBPC also said the Education Department’s plan “ignores the reality that low-income families—especially low-income families of color—are more likely to rely on Parent PLUS loans or need to get a graduate degree to earn the same salary as their wealthier white peers.”

The amendments would also give borrowers who are in default the opportunity to enroll in an income-driven repayment plan, which they were previously ineligible for.

What does this mean for other income-based repayment plans?

A factsheet from the Department of Education indicates that other income-driven repayment plans, such as Pay as You Earn (PAYE) and Income-Contingent Repayment (ICR), will be phased out and borrowers will no longer be able to enroll in such programs.

This is because the Department believes that REPAYE will likely offer the best payment program for most borrowers.

Official regulations will be finalized later this year with the goal to implement them before the end of 2023. For now, federal student loans remain frozen until 60 days after the Department of Ed is granted permission to implement Biden’s student loan relief program, or litigation around the case is resolved. Payments are set to resume in August if litigation is not solved by June 30.