The day the Biden administration unveiled its much-anticipated student loan forgiveness plan was a “day of celebration” for Justin Short.
Short, 34, graduated from the University of Missouri in 2012 with a degree in hotel management, $47,000 in federal student loans and $5,800 in private student loans. Like many borrowers, her college debt plagued her personal and financial decisions for years.
So while he found relief in lots of ads coming from the White House on August 24 – $10,000 in debt forgiveness, another extension of the payment pause until the end of the year – Short was most interested in the announcement of the proposed changes to the plans of income-based reimbursement.
The Department of Education’s new plan would cap monthly undergraduate debt payments at 5% of discretionary income, up from the usual 10% to 15% on existing plans.
The proposal also increases the amount of money considered non-discretionary income and protected from being used to calculate student loan repayments.
It would cover any accrued unpaid interest so that none of the borrower’s balance would increase if they made a qualifying payment.
And it would cancel loan balances after 10 years of payments, instead of the usual 20, for those with an initial loan balance of $12,000 or less.
This “dormant” detail of the loan forgiveness plan could be a “game changer” for millions of borrowers with remaining balances, says Julie Peller, executive director of Higher Learning Advocates, a bipartisan education nonprofit superior.
“I wish people would talk about it more than the $10,000 coin,” Short says, “because it will put more money in the pockets of ordinary, middle-class Americans who need that extra help, in especially when student loan repayments resume on Jan. 1. 1.”
“It has huge implications,” he adds.
Short was about to start making payments on his federal student loans, which were forborne, in early 2020. At the time, he was making enough money working in the hospitality industry, but even putting 10% of his discretionary income — $690 — toward student debt each month would require sacrifice, he says.
“The 10% payment plan is a lot of money,” he says — more than he thought when he was 18 and taking out these loans. He wondered, “What am I going to do now to pay off my student loan? Should I sell my car or move in with my family? I was already in the smallest apartment I could have in Kansas City.
Then Covid hit and Short was fired from his job. He has since found a new job as an assistant property manager, earning less than he used to, and taking advantage of the student loan moratorium. But the idea of resuming payments at 10% of its income by January 2023 was a burden.
Under the new income-focused plan, Short says the 5% income cap will be “life-changing” and notes that he will benefit from the increased non-discretionary income threshold.
For existing plans, the threshold that is protected from being used for loan repayments is 150% of the poverty line, or $20,385 for a single person in 2022. Under the new plan, the Department of Education would increase the amount of money borrowers can keep to 225% of the poverty line, or $30,577 a year for a single person.
It also ensures that any borrower earning the equivalent of an hourly minimum wage of $15 or less will not have to make payments on their loans under the plan.
Raising the non-discretionary income threshold is “a big recognition that people have a lot of other things on their plate,” says Peller, such as rising costs for food, housing, child care and other basic needs.
Under the new payment plan, Short expects to pay about $200 a month on his federal loans, a “much more manageable amount, not an ‘I’m going back to my parents’ situation,” he says.
“It’s a good step to recognize that borrowers over the past decade needed help, and getting that help will have a positive impact on people’s financial future for decades to come,” he adds. -he.
Another major impact of the proposed payment plan is that borrowers will no longer accrue interest on their loan as long as they make their qualified monthly payment, which could be $0 for low-income earners.
This is “a very big problem” for low-income borrowers, says Peller: Currently, if a borrower’s income is low enough, their payment may not cover the monthly interest on their loan. If so, the remaining unpaid interest is capitalized and added to the principle of the loan. This “essentially inflates payments and puts people in a cycle where they can never make progress on their student loans,” Peller said.
Getting rid of accumulated unpaid interest means that “unlike other existing income-based repayment plans, no borrower’s loan balance will increase as long as they make their monthly payments,” the White House said.
Eliminating unpaid interest could help Christian Blair, 29, a Houston attorney. He graduated from the University of Kansas Law School in 2018 with about $170,000 in federal student loans, though some of that also came from his undergraduate years.
Since taking out those loans, however, the unpaid interest has added another $30,000 to his capital.
Under the new proposal, payments for undergraduate loans will be capped at 5% of discretionary income, graduate loans will be capped at 10%and borrowers who combine the two will pay a weighted average rate.
Blair took advantage of the student loan moratorium during Covid, otherwise payments on his current plan would be nearly $2,500 a month. With a new cap and higher threshold for non-discretionary income, he expects payouts under the new income-tested regime to be much lower.
“If I make qualifying payments and my balance doesn’t continue to grow, and those payments are less than 10% of my Discretionary Income, it’s a better deal than most private offers, especially because interest that would accrue,” Blair said. .
“I was going to refinance, but not anymore,” he adds. “And I think it should be. I shouldn’t have to go through a private solution to get a better loan than I can get through the government.”
What happens next
The draft rule for the income-contingent refund proposal will be published in the Federal Register in the coming days and open for public comment for 30 days. A Department of Education spokesman said he could not comment on when the plan will be available, although experts like Peller say it could open by summer 2023.
A few big questions remain: Who will be eligible for the program, what types of loans are eligible, and how will people enroll?
“In the past, income-based repayment options were really good, but required a lot of care and attention from the borrower, with the requirement to recertify their income every year and ensure that ‘he gets his information to the services in time,’ says Peller.
“It’s going to take a good amount of clear communication with people so they don’t feel like they’re expecting something they’re not eligible for, and more importantly, so they don’t miss something. which they are eligible,” she added. .
Although Blair will have to wait to see how the income-based reimbursement proposal pans out, he says Biden’s pardon plan has already had an impact on his family.
After discussing the news with her parents last week, Blair learned that her 55-year-old father had student debt from earning an associate’s degree and was making minimum payments of $60. $ per month for almost 20 years.
His remaining balance is less than $10,000 and he will be eligible to have it wiped out under the new plan, Blair says.
“He’s the target audience for a lot of this stuff,” adds Blair: a black man “who got an associate’s degree, couldn’t afford to pay out of pocket and paid for it all my life, in big, and helped put me through school all the time. For the first time since he can remember, as an adult he won’t have student loans.
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