The long-awaited student loan update is here: The Biden administration announced Wednesday that it will cancel up to $10,000 in federal student loans for people earning less than $125,000 a year or married couples or household heads earning less than $250,000 per year, and up to $20,000 for Pell Grant recipients who meet the same income requirements.
The pause on student loan repayments, interest and collections will be extended “one last time” until December 31.
Additionally, the Department of Education has proposed a new income-focused repayment plan that could cut monthly undergraduate loan payments in half, offer a discount to some borrowers 10 years earlier, and make enrollment easier. to such payment plans.
How the repayment plan would work
Capping of monthly payments
First, the program would cap monthly payments on federal undergraduate loans at 5% of the borrower’s discretionary income, down from the usual 10%. Borrowers with both undergraduate and graduate loans will pay a weighted average rate.
The White House expects the average annual student loan payment to be reduced by more than $1,000 for current and future borrowers.
Raising the non-discretionary income threshold
The plan would also increase the threshold for what is considered non-discretionary income protected against repayment. The White House says this will ensure that anyone earning less than the annual equivalent of a $15 minimum wage will not have to make a monthly payment.
The White House gives the following example of how monthly payments would decrease under the proposed changes: A typical single public school teacher with an undergraduate degree, earning $44,000 a year, would only pay only $56 a month on his loans, compared to the $197 he pays. now under the latest income-based repayment plan. This would represent an annual saving of nearly $1,700.
Cover unpaid monthly interest
The plan would cover a borrower’s unpaid monthly interest as long as they make a monthly payment. This ensures that “no borrower’s loan balance will increase as long as they make their monthly payments,” the White House said. Borrowers making a $0 monthly payment due to unemployment or low income will also be covered.
Forgive certain loan balances sooner
And finally, the proposed plan would cancel loan balances after 10 years of payments, instead of the usual 20 years, for those with an initial loan balance of $12,000 or less. The Department of Education estimates this will make nearly all community college borrowers debt free within 10 years.
Current income-based reimbursement is ‘too complex and too limited’
The Department of Education offers four types of income-tested repayment plans, which cap monthly payments based on the borrower’s income and household size.
These types of repayment plans have been around for a while, but “existing versions of these plans are too complex and too limited,” the White House said. “As a result, millions of borrowers who could benefit are not signing up, and the millions who are signing up are often left with unmanageable monthly payments.”
He expects the proposed changes to “significantly reduce future monthly payments for low- and middle-income borrowers.”
The plan will also make it easier for borrowers to enroll starting in the summer of 2023. Borrowers will be able to let the Department of Education pull their income information automatically, rather than having to recertify every year.
The draft rule will be published on the Federal Register in the coming days and open for public comment for 30 days thereafter.
Check: Biden announces $10,000 student loan forgiveness plan — here’s who qualifies
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