The Biden administration is moving forward withwhile its main initiative, a cancellation plan of up to $20,000 in student loans per borrower, remains .
Even if the debt forgiveness effort is struck down by the courts, the Department of Education’s Plan B could help millions of borrowers by overhauling income-based repayment plans. It also addresses some of the worst pitfalls of student debt, such as “negative amortization” or when someone’s loan balance continues to grow despite their constant payments.
The planned reform of income-contingent reimbursement plans, or IDRs, has beenbut was overshadowed by the Biden administration’s plan to forgive up to $20,000 in debt per borrower. But with the debt relief program stopped in its tracks by legal challenges – and now headed to the conservative-leaning Supreme Court – the Department for Education said it was moving forward with the other part of its plan, which will revise IDRs with the aim of helping low- and middle-income borrowers.
The IDR overhaul “is extremely important,” Persis Yu, deputy executive director of the Student Borrower Protection Center (SBPC), an advocacy group for people in debt, told CBS MoneyWatch. “We see so many borrowers saying, ‘I don’t understand – I withdrew $15,000 and now I owe $40,000,’ which is emotionally demoralizing and financially devastating.”
IDRs “worked in a very toxic way before,” she said.
Here’s what you need to know.
What are income-based repayment plans?
Income-driven repayment plans are designed to make managing student loans easier by bringing a person’s monthly payment closer to their income. About a third of all borrowers are enrolled in an IDR, according to Pew Research.
But critics have pointed out that IDRs have major pitfalls. First, there are four such plans, each with their own rules and criteria, which can be confusing for borrowers. Worse still, the plans have been criticized for allowing student debt to grow through negative amortization, with an SBPC report noting that some borrowers saw their college loan obligations double or triple despite their repayment plan.
Negative amortization occurs when a repayment is not enough to cover the interest on a loan, which means that the unpaid interest is added to the principal of the loan, which can then snowball despite the borrower’s repayments. .
What would happen to IDRs under the Biden plan?
Biden administration officials said on Tuesday they would primarily cut three of the IDR plans and focus on one program they intended to simplify and make more generous. The plan that is expected to remain is called the Revised Pay As You Earn, or REPAYE, program which was first introduced in 2016.
Could this plan be challenged in court?
Because the Biden administration is proposing to revise existing IDR plans and has followed procedures to do so, Yu said she doesn’t believe that’s likely.
“Somebody could [still] come in and say, ‘You didn’t follow the rules,’ but that’s a different kind of challenge,” Yu noted.
The student debt relief plan to forgive up to $20,000 in loans faces two legal challenges: one brought by aand a second brought by with current student loans. In the first case, the states argue that the plan will hurt revenue from servicing federal loans. The second lawsuit argues that the plan represents an “executive overreach.”
What will change at REPAYE?
The Biden administration wants to overhaul the REPAYE plan through a series of regulatory proposals to be published in the Federal Register on January 11.
As part of the proposed regulatory changes, REPAYE will increase the amount of income protected from debt repayment. Currently, enrollees must make payments equal to 10% of their Discretionary Income, which is set at incomes above 150% of the federal poverty guidelines. This means that only $20,400 of income for a single borrower is considered non-discretionary and therefore protected from IDR plans.
The proposal would increase the amount of non-discretionary income for single borrowers to about $31,000, or 225% of the federal poverty level. This means that more of a borrower’s income would be safe from debt repayment, providing more money for necessities such as rent or food.
Borrowers in a family of four would have their income protected below $62,400 under the new guidelines, the Department of Education said.
The proposal will also halve the percentage of discretionary income borrowers must repay, from the current 10% to 5%.
What would happen to unpaid interest?
The proposal would eliminate the problem of negative amortization or the application of unpaid interest to a borrower’s balance.
About 7 in 10 borrowers in IDR plans saw their balances increase after joining the plans, the Education Ministry said on Tuesday.
“Under the proposed plan, a borrower would continue to have their monthly payment applied to interest first, but if there is not enough to cover that amount, the remaining interest will not be charged,” the ministry said. of Education in a press release.
Would this have an impact on loan forgiveness?
The proposal also makes some changes to loan forgiveness, shortening the time people with student debt have to get relief.
Current plans promise to cancel any remaining debt after 20 or 25 years of payments. The new regulations would wipe out any remaining debt after 10 years for those who took out loans of $12,000 or less. For every $1,000 borrowed beyond that, one year would be added.
The change would most likely help community college graduates, the Department of Education said. He estimates that 85% of community college borrowers would be debt free within 10 years of entering an IDR program.
Are certain loans or borrowers excluded from this plan?
People who have taken out Parent PLUS loans – usually parents of students – are excluded from the revised plan.
Yu of the Student Borrower Protection Center said this exclusion is detrimental to many families, as parents often rely on these loans to fund their children’s education.
Parent PLUS loans “are so easy to get and so essential for low-income families to get their children into college,” Yu noted. “The exclusion of Parent PLUS borrowers is pushing more families into poverty.”
How much would all of this save borrowers?
Typical graduates from a four-year college would save about $2,000 a year over current plans, the Department of Education said.
He added that on average, low-income borrowers would see the greatest relief, with lifetime payments per dollar borrowed decreasing by 83% on average for borrowers in the bottom 30% of income. By comparison, the top 30% of earners would see their payouts drop by 5%.
What is the projected cost to taxpayers?
Overhauling IDR plans could cost up to $190 billion, according to the Committee for a Responsible Federal Budget, a public policy group that lobbies to reduce public debt.
The group called the proposal “expensive and flawed” in a statement on Tuesday. Among his criticisms, aside from the price of the program, is that it could ultimately drive up tuition costs and encourage more Americans to take out loans to fund their college education.
The public can comment on the Biden administration’s proposal on the Regulations.gov website for 30 days.
When would the changes take effect?
The Department for Education said it expected to finalize the rules later in 2023 and believed it could start implementing some provisions later in the year.
—With Associated Press reporting.