College graduates hope that a new student loan repayment plan recently proposed by President Joe Biden will be passed. The plan, proposed on Jan. 10, 2023, will bring considerable relief for many graduates by reducing their payments and possibly offering some form of debt forgiveness after so many years of payments.
The new proposal was created by the Department of Education and is an overhaul of another existing proposal—the Revised Pay As You Earn Repayment Plan, or REPAYE. The original plan was created in 2016. Currently, four other similar proposals have already been made.
The Reason Behind the New Repayment Plan
The Department of Education claims it is “the most affordable income-driven repayment (IDR) plan that has ever been made available to student loan borrowers.” One reason for the changes, the department says, is that even before the pandemic, more than one million borrowers a year were defaulting on their education loans, which left many owing more than their initial loan because of accumulated interest.Many Payments to Be Reduced to Half—or Less
The feature of the new proposed plan that graduates will enjoy is that it will—if passed—cut their payments in half. Right now, they are paying 10 percent of their discretionary income. The new plan only requires student loan payments of 5 percent per month.New payments are also going to be determined by income levels. Borrowers at the lowest income levels will see the biggest cut—up to 83 percent less. Those at much higher income levels can expect no more than a 5 percent reduction. Post college graduates will likely have their payments remain at 10 percent.
The average minority graduate, whether Hispanic, black, American Indian, or Alaska Native, will have their federal student loan payments reduced by half. If their income is in the range of the bottom 30 percent, they also will see payments drop about 83 percent.
The New Benefit for Families with Student Loan Payments
Under the present repayment rates, single borrowers that make more than $20,400 would have to make payments. A factsheet from the Department of Education says that for single borrowers, their protected income is about equal to someone working full-time making $15 an hour. A family of four would have to make payments if they made more than $41,600.The department site also says that individuals that make less than $30,600, or if a family of four makes less than $62,400, they will not be required to make any payments. Graduates with less than $12,000 in student debt would have their debt erased after 10 years of payments.
The new plan means that the average borrower’s payments will be reduced to about 40 percent. This figure is compared to what other IDR plans are offering. The new plan will replace some of the existing plans sometime in the future.
How Payment Amounts Are Decided
When you are going to repay your federal student loans now—before the new plan takes effect—the Department of Education uses your current household income, then subtracts 150 percent of the poverty level. The new plan reduces your payment by subtracting 225 percent of the poverty level.Under the new guidelines, four-year public university graduates can expect to save about $2,000 per year compared to the existing REPAYE plan. Estimates are that about 85 percent of borrowers for community colleges will be free after 10 years of repayments.
Colleges to Be Evaluated for Quality
In the past few years, many career colleges have become known for providing less than quality training. To combat this problem, the Department of Education will publish a list of these colleges. The creation of the list will come from public feedback and evaluation. Once the list is released, schools on it will need to submit plans on improving their programs and value before being removed.Financial aid for those schools identified as having less than quality education will have their federal financial aid cut off. The Education Department is currently working on a proposal to this effect. Students seeking training from these schools will be warned about the status of the school when they apply.
The Accumulation of Interest
The Department of Education estimates that up to 70 percent of those under some of the current plans have had their balances grow. Many have made all the required payments, but still see their balances grow. It happens because their payment size is less than the accrued interest. The new rules will prevent this, even for those not required to make payments. The new plan will make payments go toward paying interest first.Parent PLUS Plans
At present, there are no plans to allow parents with Parent PLUS loans to enroll in the program. UpNorthNewsWI reports that Persis Yu, the deputy executive director of the Student Borrower Protection Center, likes the proposal, but has asked President Biden to include parents with Parent PLUS loans to be included in the new program.The Education Department’s new student loan repayment plan is open for comments from the public. There is a time limit of 30 days to make comments on the Regulations website. All comments need to be submitted by Feb. 10, 2023. After evaluating them and making final decisions about the new rules, the Department of Education will release the final version later this year.
CNBC says that after the new plan is finalized and then made available, applications from graduates with federal student loans are welcome to apply. It will take some time for lenders to prepare, but those interested in getting the new plan can apply at StudentAid.
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