What borrowers need to know about Biden’s proposed student loan repayment plan, which could cut some payments in half

Personal finance

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The Biden administration rolled out a new proposal this week to dramatically lower monthly payments for some federal student loan borrowers.

If and when the overhauled income-driven repayment plan becomes available, some people could see their bills decrease by as much as a half, according to the U.S. Department of Education.

As student debt has become a bigger burden on households, more borrowers have enrolled in income-driven repayment plans, which date back to the mid-’90s. These plans cap borrowers’ monthly bills at a share of their discretionary income with the goal of making their debt more affordable to pay off.

Between 2010 and 2017, the share of undergraduate borrowers registered in the plans swelled to around 25% from 11% , and that percentage continues to rise.

Here’s what you need to know about the proposed plan.

How does the new plan differ from existing ones?

Currently, there are four income-driven repayment plans (all of which sound a lot alike): the Income-Contingent Repayment Plan, the Income-Based Repayment Plan, the Pay As You Earn Repayment Plan and the Revised Pay As You Earn Repayment Plan.

The plans typically trade lower payments for a longer repayment timeline that concludes in debt forgiveness, providing an alternative to the Standard Repayment Plan that spreads debt obligations evenly over a decade, or 120 months.

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Under the Education Department’s new proposal, the agency isn’t creating a fifth plan but instead overhauling the current Revised Pay As You Earn Repayment Plan, or REPAYE.

Instead of charging borrowers 10% of their discretionary income a month, under the proposal, it would charge them just 5%. After 20 years of payments on undergraduate student loans, any remaining debt is canceled.

Those with original student loan balances of $12,000 or less may get their loans forgiven after just 10 years.

Who will qualify?

The new option should be available to borrowers with undergraduate and graduate student loans, although undergraduate borrowers will have lower payments.

Those with Parent Plus loans won’t be eligible to enroll in the overhauled plan.

Defaulted loans are typically ineligible for income-driven repayment plans, but under the new proposal rolled out this week, those who’ve fallen behind may be able to sign up for the income-based repayment plan.

When will the option become available?

The new REPAYE plan could officially be available July 1, 2024, according to higher education expert Mark Kantrowitz, but some parts of it may be implemented sooner. (The proposed regulation needs to go through a 30-day public comment period and then there’s a window before new rules can go into effect.)

Once the option is available, borrowers can call their student loan servicer to enroll in the new REPAYE option, or apply at StudentAid.gov.

“Any new plan will likely take quite some time to implement, so borrowers will have plenty of time to learn about how it might work,” said Scott Buchanan, executive director of the Student Loan Servicing Alliance, a trade group for federal student loan servicers.

Is the forgiven debt taxable?

The taxable issue is uncertain at this point.

Debt forgiveness used to trigger a tax bill under income-driven repayment plans. But a recent law ended that policy until at least 2025, and experts expect it to become permanent.

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