The Education Department proposes to make significant modifications to one of its existing repayment programs, which may result in a reduction of federal student loan borrowers’ monthly payments by at least half and debt cancellation in as little as a decade.
The Biden administration intends to implement revisions to the new IDR scheme, called REPAYE, by the end of 2023.
Biden’s New Student Loan Forgiveness Plan
Mid-January details on the updated income-driven repayment plan became available. It is the latest move by President Biden to reduce the nation’s $1.76 trillion in student loan debt by removing additional barriers to debt forgiveness.
Some debtors will feel this impact more than others. Those that earn the least amount relative to their debts stand to benefit the most. IDR plans limit monthly payments to a specified proportion of a borrower’s income and forgive any residual balance after a predetermined number of years of payments.
Here are five major beneficiaries of the new IDR strategy, as identified by experts.
1. Borrowers Who Attended College But Didn’t Graduate
People who took out student debts and attended some college but did not graduate with a bachelor’s degree may find themselves in a difficult situation.
According to 2017 data from the Economic Policy Institute, a progressive think tank, high school graduates with some college do not enjoy the 66% average salary boost that college graduates get compared to high school graduates with some college while having lower average loan amounts.
The new IDR plan may facilitate: After 10 years of qualifying monthly payments, the outstanding balance of student loans of $12,000 or less would be erased, a reduction from 20 to 25 years under current plans.
2. Borrowers In Places Where Cost Of Living Is High
IDR plans limit monthly student loan payments to a set proportion of a borrower’s discretionary income; currently, this is your household income less than 150 percent of the federal poverty level for your family size and area. In Virginia, if your family of four has a household income of $75,000, your non-discretionary income is $45,000 and your discretionary income is $30,000. Current IDR payment arrangements are based on a percentage of this $30,000.
The updated plan deducts 225% of the federal poverty level from your income, thereby protecting a greater portion of your wages.
The payments for the same $75,000 household would be based on only $7,500 of discretionary income. In addition, student loan payments would be set at 5% of discretionary income, rather than at least 10% under existing policies, reducing the example household’s monthly payments from $250 to approximately $31.
3. Non-Paying Borrowers
The escalation of student loan amounts may become a thing of the past. Under the amended plan, the government will cover any unpaid monthly interest as long as the borrower maintains timely monthly payments. The remaining interest would cease to rise.
Daniel Collier, assistant professor of higher and adult education at the University of Memphis who studies IDR plans, adds, The consequences on individuals of not seeing their balances increase every month will be incredibly helpful in ways that we are just beginning to understand.
High-debt-load borrowers will likely have the largest psychological effect in favor of the positive.
4. Student Loan Borrowers At Risk Of Delinquency Or Default
It may appear contradictory, but borrowers with relatively small balances exhibit exceptional default and delinquency rates, according to Dominique Baker, an associate professor of education policy at Southern Methodist University.
There is a similarity to borrowers who did not complete college: According to data from the Education Department, the default rate among borrowers who did not get a degree is three times higher than the default rate among borrowers with a diploma.
In addition, borrowers who are at least 75 days delinquent on their payments would be automatically enrolled in the updated IDR plan.
This could assist struggling borrowers to avoid defaulting on their student loans. If they lose their job or earn less than around $32,800 per year as a single filer or less than $67,500 per year as a family of four, they will be eligible for $0 monthly payments under the amended plan.
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5. Borrowers Of Color
The Education Department proposes to make significant modifications to one of its existing student loan repayment programs.
The Department of Education estimates that Black, Hispanic, American Indian, and Alaska Native borrowers’ projected lifetime payments per dollar borrowed would be reduced by 50% compared to the current REPAYE plan, whereas white borrowers’ projected lifetime payments per dollar borrowed would be reduced by 37% compared to the current REPAYE plan.
Racial income gaps are behind these estimates. Compared to the median income of white households, Hispanic households earn 75%, American Indian and Alaska Native households earn 64%, and Black households earn 61%, according to data from the 2015-2019 U.S. Census.
Black borrowers borrow the most, are more likely to borrow, and are more likely to struggle with repayment, according to Victoria Jackson, assistant director of higher education policy at The Education Trust, a non-profit organization that promotes racial and economic equity in higher education. As a result, things that improve and make student debt more manageable are likely to help the people who are harmed the most, she says.
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