U.S. Secretary of Education Miguel Cardona has stated that the modifications proposed by the Biden-Harris administration will make it easier and cheaper for students to pay back their loans. Income-driven repayment plans for federal student loans are the subject of proposed regulations from the Biden administration. According to the Department of Education, the plan will reduce payments for millions of people while also hastening the forgiveness of student loans for many others. Undergraduate borrowers will be able to better control payment in full, avoid default and default, and concentrate on establishing a better life for themselves and their family thanks to these new regulations, which will cut monthly payments in two and create accelerated channels to forgiveness.
Biden’s New Student Loan Plan
The Biden administration presented new regulations for revising the Revised Pay As You Earn (REPAYE) plan for paying down student loans. With REPAYE, a borrower’s monthly payment is calculated as a percentage of discretionary income and family size. If borrowers don’t pay their loans in full by the end of the repayment term, they may be eligible for student loan forgiveness. Many borrowers may see their monthly payments drop and their loans erased sooner than expected, thanks to the recently announced changes to the REPAYE program. However, the effects will be more significant for some borrowers than others.
Who can participate in the program that is being proposed?
Borrowers who currently have federal loans for their undergraduate or graduate studies will still be eligible, albeit undergraduate borrowers may be eligible for lower monthly payments. Parents who have taken out federal loans to pay for their children’s education are ineligible for this program. Although there are no minimum income criteria to qualify for this program, your monthly payment will be based on how much money you make each year.
Current REPAYE Plan
The original REPAYE program began in 2016, and the current program allows borrowers payments tied to 10% of the borrower’s nontaxable income. Under the REPAYE program, a borrower is eligible for debt cancellation after 20 years if they have only undergraduate loans but after 25 years if they also have loans for graduate education.
Proposed REPAYE Plan
Borrowers with federal student loans for undergraduate studies will gain the most from the new strategy recommended by Biden. With the updated REPAYE program, borrowers will only have to pay 5% of their discretionary income toward their loans. Additionally, the amount of income considered non-discretionary is being raised from 150 percent of the federal poverty level to 225 percent. The new REPAYE program is expected to reduce monthly payments for borrowers by 50%.
Borrowers with just federal education loans for graduate school will keep paying 10% of their discretionary income under the revised REPAYE plan. However, due to the increased poverty limit exclusion, these borrowers will still enjoy a slight drop in their aggregate monthly payments.
Borrowers with a combination of federal student loans for graduate and undergraduate studies will have a payment based on the average between 5% and 10% of their discretionary income, depending on the ratio of their original undergraduate and graduate loan amounts.
Capitalized Interest
One of the new proposal’s most significant features is the handling of capitalized interest. Under current income-driven plans, interest is capitalized each month. Many borrowers see their balances continue to grow, even when making regular payments.
Under the new proposed plan, the borrower’s unpaid monthly interest will be covered, even if their monthly payment is $0.
When will the plan take effect?
Since the most recent announcement is merely a recommendation at this point, it is unclear when people will be able to start enrolling in the program. The plan will be out for public review for 30 days before the government makes any serious attempt to approve it later this year. The federal government is expected to resume student loan payments in June 2023, but it is unlikely that borrowers will be able to enroll before then.
Updates on Biden’s new student loan program can be found at studentaid.gov.
