Department of Education Proposal Will Cut Student Loan Payments in Half

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The Biden administration finally unveiled its sweeping federal student loan plan on Wednesday, announcing a further extension to the payment pause through the end of the year and providing $10,000 in loan forgiveness to individual borrowers who meet certain income requirements.

Also included in the plan is a U.S. Department of Education proposal that would cut monthly payments in half for undergraduate loans, raise the amount of income that would be protected from repayment, forgive some loan balances 10 years earlier than current rules allow, and simplify the process of enrolling in certain payment plans.

A White House Fact Sheet released on Wednesday said the Biden administration is “reforming student loan repayment plans so both current and future low- and middle-income borrowers will have smaller and more manageable monthly payments.”

The Fact Sheet noted that the Education Department has the authority to create income-driven repayment plans that cap what borrowers pay each month based on a percentage of their discretionary income. Currently, most of these plans cancel a borrower’s remaining debt after 20 years of monthly payments – something the White House claims is “too complex and too limited.” The result is that millions of borrowers who might benefit from the plans don’t sign up for them, and the millions who do sign up “are still often left with unmanageable monthly payments.”

To help address these concerns, the Department of Education proposes reforms that would do the following:

  • Cut undergraduate loans in half: The amount borrowers must pay each month would be reduced to 5% from 10% of discretionary income.
  • Raise the amount of income that is considered non-discretionary income and therefore is protected from repayment: This would guarantee that no borrower earning under 225% of the federal poverty level would have to make a student loan payment. The current federal poverty level is roughly the annual equivalent of a $15 minimum wage for a single borrower.
  • Forgive loan balances after 10 years of payments instead of 20 years: This would apply to borrowers with original loan balances of $12,000 or less. The Education Department estimates that this reform will allow nearly all community college borrowers to be debt-free within 10 years.
  • Cover the borrower’s unpaid monthly interest: Unlike other existing income-driven repayment plans, under this rule no borrower’s loan balance will grow as long as they make their monthly payments — even when that monthly payment is $0 because their income is low.
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These reforms would simplify loan repayments and deliver “significant savings” to low- and middle-income borrowers, the White House said. It offered the following examples:

  • A single construction worker making the typical income of $38,000 a year with a construction management credential would pay only $31 a month vs. the $147 they pay now under the most recent income-driven repayment plan.
  • A typical single public school teacher with an undergraduate degree (making $44,000 a year) would pay only $56 a month on their loans, down from the $197 they pay under the current income-driven repayment plan.
  • A typical nurse (making $77,000 a year) who is married with two kids would pay only $61 a month on their undergraduate loans, down from the $295 they pay under the current income-driven repayment plan.

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