The Other Big Student Loan News: Changes to Repayment

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This week, all eyes were on student loan forgiveness news. And it makes sense: Borrowers have waited months for the president to make a decision on his campaign promise to forgive at least $10,000 in student loan debt.

But hidden in the cancellation details, you might have missed something – a new income-based repayment plan, or IDR, that can cut monthly payments by half or more without the threat of a bloated balance. .

Experts note that this change will likely benefit women and borrowers of color the most.

“It’s the type of capital-rich action that I’ve never seen any other administration take anywhere else,” says Lodriguez Murray, senior vice president of public policy and government affairs at the United Negro College Fund. .

How existing income-based repayment plans work

Under existing income-driven plans, unpaid interest accrues over time and, after certain qualifying events, is added to the borrower’s balance with penalties. Borrowers who take a month forbearance – say they lose their job and have to skip a payment – not only see the skipped payment added to their principal, but also every penny of interest accrued over the years.

This interest accumulation is the primary trigger that can result in balances many times greater than the original debt, even after decades of payments.

“Current IDR programs are suboptimal from a borrower’s perspective,” says Daniel Collier, an assistant professor at the University of Memphis, whose research focuses on student debt and income-contingent repayment and policy. free tuition. “It seems like people are still struggling massively even to get registered for IDR.”

The Biden administration acknowledges that existing IDR programs are “too complex and too limited.”

However, borrowers using the new plan will not see their balance increase, as long as they make their lower monthly payments. This, Collier says, makes the IDR changes one of the most impactful aspects of the cancellation announcement.

Here’s what current and future borrowers need to know about the new regime.

The new income-based repayment plan

All registrants will pay less

The amount you pay each month under an income-based repayment plan is based on your discretionary income, not your loan balance. Discretionary income is what is left after basic living needs, such as food or shelter.

Currently, the Department of Education calculates discretionary income as your household income minus 150% of the federal poverty guideline for your family size and location. If your household income is $75,000 for a family of four in Virginia, your non-discretionary income is $41,625 and your discretionary income is $33,375. The income-tested reimbursement amount is a percentage of $33,375.

The new plan places the discretionary income threshold at 225% of the federal poverty guideline. That same $75,000 household would see payments based on $12,572.50 of discretionary income.

But those with undergraduate loans save the most

Current income-tested repayment plans require borrowers to pay 10% of their discretionary income each month. Under the new plan, the income-contingent repayment for undergraduate loans will be set at 5% of discretionary income.

This means that in addition to the reduced repayment amount based on the change in discretionary income calculations, borrowers with undergraduate loans will pay half of what is now required.

For the family with a household income of $75,000, this is the difference between a monthly payment of $278 and a payment of $52.

The dollar amount of the cancellation is the number anyone can easily identify, says Patrick Quinn, parenting expert at educational website Brainly. “But really,” he says, “the long-term effect that you’ll see for most families will be that 10% to 5% drop.”

While it’s unclear whether graduate debt will be included in the 5% refund, all enrollees will pay less because their discretionary income will decrease.

“If grads with debt are still paying 10%, it’s not the same 10% as before,” Collier says.

Those who borrow smaller amounts can see forgiveness sooner

Borrowers are eligible for forgiveness of their remaining balance after 20 or 25 years with current IDR plans. However, the new plan reduces that time frame to 10 years for borrowers with an original loan balance of $12,000 or less.

A recent NerdWallet Analysis found that only borrowers with starting annual salaries of $20,000 and $30,000 with 3% annual increases are likely to see forgiveness after 20 years with the current IDR plan. With the new plan, the Department of Education projects that almost all community college borrowers will be debt-free within 10 years.

Jeff Strohl, director of research at Georgetown University’s Center on Education and Workforce, said while not everyone will be happy with the new IDR plan – especially those who may be excluded of the biggest benefits – “it’s going to offer a lot of help to people by reducing their debt and making college more affordable.

What we still don’t know

While student loan experts and advocates applaud the proposed changes to the IDR, there are many unknowns around which loans will be included and when the program might begin.

The wording around the move from 10% to 5% discretionary income for payments is very clear for undergraduate loans, but it’s unclear how it will work for graduate loans or borrowers with undergraduate loan debt. cycle and undergraduate. Some experts assume debt will remain with the 10% discretionary income allowance, while others provide for a graduated or sliding scale based on income or debt levels.

It’s also unclear when (or if) unpaid interest will be capitalized and whether graduate and parent loans PLUS are included in the new IDR rules. There is no explicit communication yet that these loans are included, but experts warn borrowers to wait for the administration to finalize the new plan before jumping to conclusions.

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