Here's What's In Biden's New Income-Driven Repayment Plan Program

Though President Biden’s sweeping loan forgiveness plan may be stuck in the legal mud with a Supreme Court battle imminent, the Administration still has some tricks up its collective sleeve to help ease the burden of student loans. One such trick is a new plan announced by the Biden Administration to revamp the Income-Driven Repayment program, a program for student loans that is supposed to set your monthly student loan payments at a rate that should be affordable, based on your income.

The new plan, announced Tuesday, will focus on limiting payment amounts for low- and middle-income borrowers, specifically those taking advantage of Income-Driven Repayment (IDR) plans.

Income-Driven repayment plans are payment plans for low and middle-income federal borrowers, in which your monthly student loan payment is based on your income and your family size.

The intent of these plans is to have the payment be affordable based on how much you bring home — and after 20 to 25 years of consistent payments, in theory, your loans are paid off completely.

It is, of course, not that simple in practice. The problems with IDR are storied: for many, the current formula, which usually sets monthly payments at 10% of discretionary income, still feels unaffordable based on where they live and how far their money will take them. And, bureaucratic issues have all led to lost paperwork, interest growth, delays in IDR processing, and predatory loan servicers that ultimately prevents borrowers from getting their loans cancelled despite consistent payments.

According to information from the Education Department, borrowers in Income-Driven Repayment plans can expect the following:

• Single borrowers who earn less than $15 per hour, or around $30,600 per year, will qualify for a $0 per month payment
• Married borrowers in a family of four who earn less than approximately $62,400 per year will qualify for $0 per month
• Monthly undergraduate loan payments will be cut by 50% for those whose earnings surpass the thresholds listed above
• For those with IDR plans who do not meet the income requirements for $0 per month payments, the proposal would decrease required monthly payment from 10% to 5% of monthly income — 5% for undergraduate borrowers, and 10% for graduate borrowers
• If a borrower’s monthly IDR payment doesn’t fully cover interest on those loans, that interest will be forgiven
• Students with less than $12,000 of original debt would see remaining balances wiped away after a decade of payments, instead of two decades, per NerdWallet

According to ABC News, low-income borrowers could see payments drop as much as $0.83 per dollar owed, and the highest-income borrowers could see a drop of $0.05 per dollar owed.

"Today, the Biden-Harris administration is proposing historic changes that would make student loan repayment more affordable and manageable than ever before," U.S. Secretary of Education Miguel Cardona said in a statement. "We cannot return to the same broken system we had before the pandemic, when a million borrowers defaulted on their loans a year and snowballing interest left millions owing more than they initially borrowed.”

How does the Income-Driven Repayment Plan proposal affect interest?

Significantly. Under the new plan, unpaid interest will be forgiven as long as payments have been made as scheduled.

The plan will also address the problem of interest capitalization, an underhanded technique that results in increased principal balances by rolling unpaid interest into student loan balances, thereby charging interest on interest, and causing balances to rise even when monthly payments have been made on time.

“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,” Cardona said.

Analysts expect the changes to result in loans being paid off 10 to 20 years after they’re taken, compared to 20 to 30+ years, as expected under current regulations.

What about one-time student loan forgiveness?

Although the Biden Administration’s goal of forgiving $10,000 per borrower and up to $20,000 per borrower for Pell grant recipients is being tested in court, the new Education Department proposal will make it easier for borrowers to achieve full student loan cancellation through already established programs.

Those who participate in the Public Service Loan Forgiveness program, which has been beleaguered by bureaucratic red tape and administrative snafus, stand to achieve forgiveness in less than half the time currently promised by the Public Service Loan Forgiveness program.

President Biden announced his much-anticipated student loan forgiveness program last August, but Republican lawmakers from around the country quickly rebuffed it, challenging its constitutionality and resulting in the entire program grinding to a halt.

The Supreme Court will hear arguments regarding two cases brought against the Biden Administration in February, with an expected decision to come in June. Until then, the pandemic-era student loan payment pause will continue until at least June 2023, providing borrowers with a little more time to plan for the future in an increasingly unstable economic environment.