What You Need to Know About Biden's New Student Loan Plan
On January 10, 2023, the U.S. Department of Education (DOE) proposed a revised salary when you earn plan. This was due to President Biden's pause on student loan forgiveness. The proposed plan is the Department of Education's latest effort to make student loan payments more affordable. If done, it would reduce the monthly payments for millions of college borrowers.
Background to Biden's loan forgiveness and revised pay-as-you-earn repayment plan.
President Biden announced a landmark student loan forgiveness plan on August 24, 2022. The plan promised to cancel up to $20,000 in federal student loans for eligible borrowers who received Pell Grants in college. Those who have not received a Pell Scholarship will be eligible for a waiver of up to $10,000. Individuals earning less than $125,000 or households earning less than $250,000 were eligible for debt forgiveness with the Biden plan.
Unfortunately, a few months after the loan forgiveness plan was announced, a Texas federal judge declared it illegal and sued. Several other countries followed suit, effectively blocking the plan. For now, Biden's debt cancellation plan remains in limbo, pending a final court decision.
After the setback, the Department of Education is looking for other ways to make student loan payments more accessible. The newly revised Pay As You Earn plan hopes to do just that.
What is the new student loan payment plan?
The new student loan payment plan basically changes the existing option to make it more convenient for the borrower.
Currently, federal student borrowers can choose from four income-based payment plans. These payments include Income Based Payment (IBR), Contingent Income Payment (ICR), Pay As You Earn (PAYE), and Pay As You Earn Revised (REPAYE). All of these plans base monthly payments on the borrower's income and other factors. However, each plan differs in eligibility requirements, payment formats, and terms and conditions. These monthly payments are recalculated each year and may change or remain the same. Borrowers who enroll in any of these plans have the right to forgo the balance after 20 or 25 years, depending on the plan.
Rather than create a fifth plan on this list, the DOE decided to redesign the existing Revised Pay As You Go (REPAYE) plan. Currently, REPAYE calculates monthly payments as 10% of the borrower's discretionary income. Discretionary income is defined as total income greater than 150% of the federal poverty line adjusted for family size. Borrowers with only college loans who are currently enrolled in REPAYE may qualify for student loan forgiveness after 20 years. Borrowers who have taken out loans from graduate schools are eligible for student loan forgiveness after 25 years.
Newly proposed revised repayment plan (Repayment) where your earnings offer favorable terms to the borrower.
What does the new adjusted payment mean to you as your earnings?
There is no doubt that this is one of the most generous of all income paying programs out there. What does it mean to you if the proposed plan is approved?
1. More of your income from payments will be protected.
The new payment plan increases the amount of income protected from withdrawal from 150% to 225% of the federal poverty guidelines. Under the new plan, individual borrowers will not be required to make monthly loan payments if their annual income is less than $30,500. This means if you're making $15 an hour or less, you don't have to make monthly student loan payments.
Borrowers with household income of less than $62,400 for a family of 4 also do not have to make payments under the plan.
2. Your monthly loan payments can be reduced by 50% for a subordinated loan.
Another big change the new plan proposes is to reduce the discretionary income that counts as payments. in its current form. Payments on most IDR plans are capped at 10% of the borrower's discretionary income.
The newly revised Pay When You Earn plan suggests reducing that amount by 5%. This means that borrowers who now pay 10% of their discretionary income will only pay 5% of their monthly income. This can significantly reduce the borrower's payments, freeing up more cash for other essential expenses. Only borrowers with federal college student loans are eligible for this new plan.
3. Unpaid interest will not be accrued.
The newly revised Repayment Plan (Repayment) proposes to stop accumulating unpaid interest for borrowers who make regular payments on time. Unpaid interest usually accrues when the payments the borrower can afford are less than the interest he or she is owed. Stopping this deposit will also stop the growth of borrowers' balances.
If the proposed plan is approved, the monthly loan installments will be applied to the first interest. If the payment is not sufficient to cover the total interest owed, no fee will be applied to the remaining interest. Only those borrowers who make regular and timely payments will be eligible for this benefit.
4. You will be protected from negligence and forgiveness.
Stopping payments by default or forgiving reduces the risk of default on your loans. However, you still pay the price. The new scheme aims to protect borrowers from these consequences. Under the new plan, borrowers who are 75 days behind on their payments will be automatically enrolled in another income-driven payment plan with the lowest payments they're eligible for.
5. College loan borrowers can pay off their loans early.
The attraction of income-based repayment plans is that they offer borrowers a way to pay off the loan after a certain period of time. Currently, borrowers can be forgiven of the remaining balance after 20 or 25 years of regular payments.
The new plan proposes forfeiting outstanding loans to college borrowers after 10 years of regular repayment. This will only apply to college loans with a principal balance of $12,000 or less. The idea behind the proposal is that taking 20 to 25 years to pay back a relatively small sum of $12,000 seems unnecessarily long.
This update will help nearly all community college borrowers pay their debts in full within 10 years.
6. The composition of the loan will determine the student loan repayment schedule.
The proposed new REPAYE plan includes several student loan forgiveness schedules for borrowers with undergraduate student loans. How long it takes for a borrower to qualify for forgiveness depends on the type of federal student loan the borrower has and the initial loan balance.
Borrowers with college loans are eligible for student forgiveness after 10 years if their starting balance is $12,000 or less.
Undergrad borrowers with an opening balance between $12,000 and $20,000 can qualify for loan forgiveness at any time between 10 and 20 years. The exact amount will depend on the balance.
Borrowers with a starting balance of $20,000 or more in college loans can be forgiven of any outstanding balance after 20 years.
Borrowers who are in employment that qualify for Public Service Loan Forgiveness (PSLF) will still be eligible for loan forgiveness even after 10 years.
Who is excluded from the new modified salary when you earn the payment plan?
Graduate loan borrowers do not receive all of the benefits of the proposed plan.
Those with graduate-only federal student loans will continue to be paid 10% of their discretionary income. However, further exclusion of the poverty threshold may result in a slight decrease in their gross monthly payments.
Parents plus borrowers are not eligible for any benefits from the proposed new revised salary when you get a payment plan.
There is still a long way to go before these proposed changes are implemented. The formal regulations are expected to be finalized by the end of the year and enter into force before the end of 2023.