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All eyes have been on student loan cancellation news. And that makes sense: Borrowers waited months for the president to make a decision on his campaign promise to cancel at least $10,000 in student loan debt.
But tucked in the details around cancellation was something you might have missed — a new income-driven repayment, or IDR, plan that may cut monthly payments by half or more without the threat of a ballooning balance.
Experts note that this change is likely to benefit women and borrowers of color most.
“It’s the type of equity-rich action that I’ve never seen any other administration take on any other item,” says Lodriguez Murray, senior vice president of public policy and government affairs with the United Negro College Fund.
How existing income-driven repayment plans work
Under existing income-driven plans, unpaid interest grows over time and, after certain qualifying events, is added to the borrower's balance with penalties. Borrowers who take a month of forbearance — say they lose their job and need to skip a payment — see not only the skipped payment added back to their principal, but also every penny of interest that accumulated over the years.
That interest accrual is the key trigger that can lead to balances many times larger than the original debt, even after decades of payments.
“Current IDR programs are not optimal from the borrower perspective,” says Daniel Collier, a University of Memphis assistant professor whose research focuses on student loan debt and income-driven repayment and tuition-free policy. “It seems like people are still massively struggling even being enrolled in IDR.”
The Biden administration acknowledges existing IDR programs are “too complex and too limited.”
However, borrowers who use the new plan won't see their balances grow, as long as they make their reduced monthly payments. That, Collier says, makes the IDR changes among the most impactful aspects of the cancellation announcement.
Here’s what current and future borrowers need to know about the new plan.
The new income-driven repayment plan
All enrollees will pay less
The amount you pay each month on an income-driven repayment plan is based on your discretionary income, not your loan balance. Discretionary income is what’s left over after essential life needs, such as food or housing.
Right now, the Education Department calculates discretionary income as your household income minus 150% of the federal poverty guideline for your family size and location. If your household income is $75,000 for a family of four in Virginia, your nondiscretionary income is $41,625 and your discretionary income is $33,375. The income-based repayment amount is a percentage of $33,375.
The new plan places the threshold for discretionary income at 225% of the federal poverty guideline. That same $75,000 household would see payments based on $12,572.50 of discretionary income.
But those with undergraduate loans stand to save the most
The current income-driven repayment plans require borrowers to pay 10% of their discretionary income each month. Under the new plan, income-driven repayment for undergraduate loans will be set at 5% of discretionary income.
This means, in addition to the lowered repayment amount based on the change in discretionary income calculations, borrowers with undergraduate loans will pay half of what is now required.
For the family with $75,000 in household income, that’s the difference between a $278 monthly payment and a $52 payment.
The cancellation dollar amount is the number everyone can easily identify, says Patrick Quinn, parenting expert at the education website Brainly. “But really,” he says, “the long term effect that you will see for most families will be that drop from 10% to 5%.”
Though it is unclear whether graduate debt will be included in the 5% repayment, all enrollees will pay less because their discretionary income will decrease.
“If people with graduate debt are still paying 10%, it’s not the same 10% as it was before,” says Collier.
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Those who borrow smaller amounts may see forgiveness sooner
Borrowers are eligible for forgiveness of their remaining balance after 20 or 25 years with current IDR plans. However, the new plan cuts that time to 10 years for borrowers with original loan balances of $12,000 or less.
A recent NerdWallet analysis found that only borrowers with starting annual salaries of $20,000 and $30,000 with 3% yearly raises stand to see forgiveness after 20 years with the current IDR plan. With the new plan, the Education Department projects that nearly all community college borrowers will be debt-free within 10 years.
Jeff Strohl, research director at the Georgetown University Center on Education and the Workforce, says while not everyone will be happy with the new IDR plan — specifically those who may be cut out of the biggest benefits — “it’s going to offer a lot of help to people in lowering their debt and making college more affordable.”
What we still don’t know
While experts and student loan advocates applaud the proposed IDR changes, there are many unknowns around which loans will be included and when the program might begin.
Wording around the change from 10% to 5% of discretionary income for payments is very clear for undergraduate loans, but it’s unclear how that will work for graduate loans or borrowers with graduate and undergraduate loan debt. Some experts assume that debt will stay with the 10% discretionary income allotment, while others foresee a graduated or sliding scale based on income or debt levels.
It’s also unclear when (or if) unpaid interest will capitalize and whether graduate and parent PLUS loans are included in the new IDR rules. There is no explicit communication yet indicating those loans are included, but experts caution borrowers to wait for the administration to finalize the new plan before jumping to conclusions.
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