What to know about proposed changes to income-driven student debt plans

WASHINGTON (TND) — The Biden administration released its new proposal to reform the income-driven repayment plan for student loan debt in a decision that will affect millions of borrowers if the rules go into effect.

The proposed regulations would reduce the cost for middle- and lower-income borrowers of federally held student loan debt and drastically reform the way the system has operated for years.

Under the new proposal, undergraduate borrowers would have their monthly payments cut in half with a new cap on how much discretionary income goes to their debt. Current guidelines cap monthly payments at 10% of a person’s discretionary income, which would be dropped to 5%.

It also changes who is required to make a payment. People who make less than roughly $30,600 a year will not have to make payments on the revised plan, compared to $20,400 in annual salary under existing plans.

"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. "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.”

Borrowers who make their monthly payments will not be charged for unpaid interest, a change that would stop debt from snowballing beyond the balance they originally took out.

Income-driven repayment plans were designed to help people from being financially buried by loans they could not afford but their implementation has been messy. Poor record-keeping by the Education Department may have led to thousands of people not having their loans forgiven, and experts have said the variety of options in income-driven plans can be very confusing for borrowers.

The new proposal could help solve some of the confusion, as new enrollment in two of the income-driven plans would be phased out and circumstances where a borrower could switch into a plan would be limited.

Republicans have attacked the administration’s student debt policies as wasteful and helping America’s highest earners, who are more likely to hold larger sums of student debt. There have also been questions about whether the Education Department will be able to target debt relief to those who need it most.

One of the most notable changes in the Education Department’s proposal is changing who will qualify for forgiveness. People who borrowed $12,000 or less would have the remainder of their balance forgiven after 10 years of payment. Every additional $1,000 borrowed would add a year onto the total needed for forgiveness.

Current plans require 20 or 25 years of payments depending on the program.

“Expansions of already generous repayment options, institutional shame lists, and other failed policies of the past won’t lower the cost of college for students and families. It does, however, turn the federal loan program into an untargeted grant with complete disregard for the taxpayers that fund it,” said Rep. Virginia Foxx, R-N.C., and chair of the House Education and the Workforce Committee. “Without real, comprehensive reform to our postsecondary financing and accountability systems, we will be left with ineffective and expensive policies by an administration dead set on bankrupting our country.”

Changes to the income-driven repayment plan were announced along with Biden’s move to cancel up to $20,000 in student loan debt for some borrowers but were finalized Tuesday when the proposal was put up for public comment.

Biden’s broad cancellation plan is currently on hold ahead of Supreme Court arguments in two cases brought on challenging the president’s legal authority to unilaterally wipe away the debt.

The nonpartisan Congressional Budget Office estimates the wider cancellation would cost the U.S. about $400 billion over 30 years. The Biden administration estimates the proposed changes to the income-driven repayment plan would cost $138 billion, though other experts have found higher totals.

Estimates by the Committee for a Responsible Federal Budget found all of Biden’s student debt proposals could cost up to $600 billion.

“The idea of strengthening and reforming the IDR program is a good one, but the specifics of this proposal are a costly mess,” said Maya MacGuineas, CRFB president. “This administration should abandon their unilateral effort to remake higher education financing, and instead work with Congress on a thoughtful package of reforms that truly address college costs and value.”