New Income Driven Student Loan Repayment Plan Could Impact Borrowers’ Finances Positively for Decades

A stack of one hundred dollar bills in a money wrapper labeled "Student Loan" on top of a blue graduation cap.
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Much of the public focus on President Joe Biden’s loan forgiveness plan has zeroed in on two things: the extension of the federal student loan payment pause until the end of the year and the $10,000 in loan forgiveness to individual borrowers who meet certain income requirements.

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But for many borrowers, the biggest long-term impact is an income-driven provision that would permanently reduce their monthly payments.

As previously reported by GOBankingRates, the Biden plan includes 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 last month indicated 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.”

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The Education Department plan includes the following reforms:

  • Cut undergraduate loans in half by reducing the amount borrowers must pay each month to 5% from 10% of discretionary income.
  • Raise the amount of income that is considered non-discretionary and therefore protected from repayment.
  • Forgive loan balances after 10 years of payments instead of 20 years.
  • Cover unpaid monthly interest so that no borrower’s loan balance will grow as long as they make their monthly payments.

Currently, the non-discretionary income threshold that is shielded from being used for loan repayments is 150% of the poverty level, or $20,385 a year for a single person, CNBC reported. Under the new plan, that would be raised to 225% of the poverty level, or $30,577 a year for a single person.

Justin Short, who had nearly $53,000 in student debt when he graduated from the University of Missouri a decade ago, told CNBC the 5% income cap will be “life-changing,” and also said that he’ll benefit from the higher threshold for non-discretionary income.

Julie Peller, executive director at Higher Learning Advocates, had a similar take, telling CNBC that the Education Department proposal could be a “game changer” for millions of borrowers.

“[It’s] a big recognition that people have many other things on their plate (financially),” Peller said.

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She also called the interest provision “a really big deal” for low-income borrowers because, under the current system, if a borrower’s income is low enough their loan payment might not even cover the monthly interest on their loans. This means the remaining unpaid interest gets capitalized and added to the loan principle.

“[It] essentially balloons the payments and puts people in a cycle of never being able to make forward progress on their student loans,” Peller said.

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But as CNBC noted, there are still some important details that need to be ironed out in the coming weeks, including who will be eligible for the program, which types of loans qualify and how people can enroll.

“It’s going to require a good amount of clear communication to people so they don’t feel they’re expecting something they’re not eligible for, and more importantly, so they don’t miss something they are eligible for,” Peller said.

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About the Author

Vance Cariaga is a London-based writer, editor and journalist who previously held staff positions at Investor’s Business Daily, The Charlotte Business Journal and The Charlotte Observer. His work also appeared in Charlotte Magazine, Street & Smith’s Sports Business Journal and Business North Carolina magazine. He holds a B.A. in English from Appalachian State University and studied journalism at the University of South Carolina. His reporting earned awards from the North Carolina Press Association, the Green Eyeshade Awards and AlterNet. In addition to journalism, he has worked in banking, accounting and restaurant management. A native of North Carolina who also writes fiction, Vance’s short story, “Saint Christopher,” placed second in the 2019 Writer’s Digest Short Short Story Competition. Two of his short stories appear in With One Eye on the Cows, an anthology published by Ad Hoc Fiction in 2019. His debut novel, Voodoo Hideaway, was published in 2021 by Atmosphere Press.
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