The Definitive Guide to Student Loans

President Biden just announced updates to student loan repayment—here's what borrowers need to know

President Joe Biden speaks about student debt relief at Central New Mexico Community College Student Resource Center in November 2022.
Getty Images | Saul Loeb

The Biden Administration released details this week on its plan to overhaul the current income-driven repayment plan known as Revised Pay As You Earn plan (REPAYE) for federal student loan borrowers.

Last August, President Joe Biden announced these changes would be coming along with student debt forgiveness of up to $20,000 for borrowers earning less than $125,000 annually, which is currently paused awaiting a Supreme Court decision. 

All student borrowers with direct federal loans (not parent PLUS loans) are eligible for REPAYE repayment plans. The updates to REPAYE will be open for public comment for 30 days and may start to take effect later this year, according to an Education Department press release

Here's what's slated to change.

Monthly payments reduced to 5% of discretionary income

Under the current REPAYE plan, borrowers' monthly payments are calculated as 10% of their discretionary income, defined as any income above 150% of the poverty guideline amount for their state.

Using 150% of the federal poverty line — $20,400 — a single borrower earning $25,000 annually could be expected to pay about $38 per month on their loans, or about $460 per year.

However, under the proposed plan, payments would be capped at 5% of discretionary income and the standard of discretionary income would rise to 225% of the poverty level. Federally, that's roughly $30,500 for single households. 

$0 monthly payments for low-income borrowers

The proposal would also reduce monthly payments to $0 for single borrowers earning less than $30,500 and any borrower in a "family of four" earning less than $62,400, according to an Education Department fact sheet.

The change would also stop interest from accruing on balances while borrowers qualify for $0 monthly payments.

No interest accumulation while making regular payments

Under the current REPAYE plan, sometimes borrowers' monthly payments are lower than the interest accrued on the loan. That means borrowers can still see balances growing even if they make full, on-time payments. The government currently subsidizes some of that interest accrual, but not all of it.

The proposed change would eliminate additional interest after a borrower's monthly payment is applied. That means borrowers who qualify for a $0 monthly payment would not see additional interest growing on their balances. 

Easier path to loan forgiveness

Borrowers on the existing REPAYE plan are eligible to have any remaining loan balances forgiven after 20 years of monthly payments for undergraduate loans or 25 years for graduate or professional study loans. 

Biden's proposal would consider the borrower's original loan balance to determine forgiveness eligibility. Those who borrowed $12,000 or less would be eligible for loan forgiveness after 10 years of monthly payments. Every $1,000 borrowed above that amount would add one year of payments before forgiveness eligibility.

Additionally, the proposed change would allow borrowers who enter deferment for a variety of reasons, such as military service or cancer treatment, to still earn credit for payments toward forgiveness. Currently, only economic hardship deferments allow borrowers on income-driven repayment (IDR) plans to continue their progress toward forgiveness.

Borrowers may also consolidate their loans without resetting their progress toward forgiveness. Currently, borrowers on REPAYE plans who consolidate their loans lose any progress they had made toward forgiveness.

For instance, a borrower who had made 100 monthly payments (out of the required minimum 240 monthly payments before loan forgiveness) and then consolidated their loans would have to start over, according to the Federal Student Aid website.

The new plan would give borrowers a weighted average of credit for payments before consolidation, so not all their progress would be lost.

Automatic enrollment for at-risk borrowers

The Education Department acknowledges that in the past too many borrowers defaulted on their loans when they may have qualified for lower or $0 payments on a different repayment plan. The proposal aims to fix that by automatically enrolling borrowers who are at least 75 days behind on payments in an IDR plan that offers the lowest monthly payment. 

Borrowers with loans in default would also gain access to IDR plans. Currently, borrowers only have the option to rehabilitate or consolidate loans in default. 

Correction: This story has been updated to reflect that a borrower earning $25,000 annually would currently owe around $38 per month on their loans. An earlier version misstated this amount.

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