This week, the Biden administration unveiled a new plan to drastically reduce some borrowers’ monthly payments on a federal student loan.
Some customers may experience a bill reduction of up to 50% if and when the updated income-driven repayment plan is made accessible, according to the U.S. Education Department
Student Loan Repayment
Since the middle of the 1990s, more borrowers have engaged in income-driven repayment
plans as student debt has become a greater burden for families. These programs aim to make it easier for borrowers to repay their debt by capping their monthly expenses at a portion of their discretionary income.
The percentage of student borrowers registered in the plans increased from 11% to roughly 25% between 2010 and 2017, and it has since continued to rise. Here’s what you need to know about the proposed plan.
Currently, there are four income-driven repayment options (all of which sound a lot alike): the Income-Contingent Repayment Plan, the Income-Based Repayment Plan, the Pay As You Earn Repayment Plan and the Revised Pay As You Earn Repayment Plan.
The programs offer an alternative to the Standard Repayment Plan, which equitably distributes debt obligations across a decade, or 120 months, and trades lower payments for a lengthier repayment timetable that ends in debt forgiveness.
The revised Pay As You Earn Repayment Plan, or REPAYE, which is the current plan, will be updated under the Education Department’s new proposal.
According to the idea, it would only charge borrowers 5% of their monthly discretionary income as opposed to the current 10%. Any outstanding debt on undergraduate student loans is forgiven after 20 years of payments.
After just 10 years, borrowers with original student loan balances of $12,000 or less may be forgiven of their debt.
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Who Will Be Eligible?
Some customers may experience a bill reduction of up to 50% if and when the updated income-driven repayment plan is made accessible, according to the U.S. Education Department
Both undergraduate and graduate borrowers should be able to use the new option, while undergraduate borrowers would have smaller payments.
Those with Parent Plus loans won’t be eligible to enroll in the overhauled plan. Defaulted loans are normally ineligible for income-driven repayment plans, but under the new idea announced this week, borrowers who’ve fallen behind may be able to sign up for the income-based repayment plan.
When Will It Be Accessible?
Mark Kantrowitz, an expert on higher education, estimates that the new REPAYE plan might go into effect on July 1, 2024, while some components might be implemented sooner. (A 30-day public comment process is required for the proposed regulation, after which there is a timeframe for new rules to take effect.)
When the option becomes available, borrowers can apply online at StudentAid.gov or by calling their student loan servicer to sign up for the new REPAYE option.
According to Scott Buchanan, executive director of the Student Loan Servicing Alliance, a trade association for federal student loan servicers, “Any new strategy will likely take quite some time to execute, so borrowers will have plenty of opportunity to learn about how it might function.”
Currently, there is uncertainty over the tax problem. Under income-driven repayment schemes, a tax bill used to be triggered by debt forgiveness. However, a recent regulation put an end to that practice until at least 2025, and analysts anticipate that it will then become permanent.
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