Photo by Cole Keister on Unsplash
The Student Loan Forgiveness Plan stands in limbo as borrowers wait for the Supreme Court to rule on the plan later this year. In the meantime, President Biden and the U.S. Department of Education have proposed major changes to an income-driven repayment plan that could provide additional relief to borrowers.
REPAYE
Known as Revised Pay As You Earn or REPAYE, the student loan income-driven repayment (IDR) plan allows some borrowers to make reduced payments on their loans based on their income, with possible forgiveness of any remaining debt after 10 years.
Under the old rules…
- Borrowers paid 10% of the amount their income exceeding 150% of the Federal poverty line.
- Unpaid balances were forgiven after 20 years of payments, regardless of the loan balance.
- IDR loan payments for married couples was based on both spouses’ income.
Under the new rules…
- Borrowers pay 5% of the amount their income exceeding 225% of the Federal poverty line.
- Loan balances under $12,000 will be forgiven after 10 years of payments.
- Married borrowers can file separately, excluding their spouse’s income from the calculation.
- Interest will not accrue, if regular payments are being made.
With the revised REPAYE plan, borrowers with incomes below 225% of the Federal poverty line would have a payment of $0. Others would see their monthly payment cut in half.
Under the current IDR borrowers can sometimes see their loan balances continue to grow as they make minimum payments because the interest on the loan is greater than the monthly payment amount. Under the new proposed plan, this will no longer be the case as the interest will not accrue as long as a borrower continues to make regular payments.
The Department of Education estimates that borrowers on the revised income-driven repayment plan “would see their total payments per dollar borrowed decrease by 40%. Borrowers with the lowest projected lifetime earnings would see payments that are 83% less.”
These changes apply only to undergraduate Federal student loan debt. Graduate loan payments are still based on 10% of your discretionary income. Private loans and PLUS loans are not eligible. To calculate an estimate of your revised payment, check out this calculator from NerdWallet.
Of course, a lower monthly payment doesn’t necessarily mean a student will pay less on their loans over time. How much a student ultimately pays depends on a variety of factors such as the borrower’s total income earned over the life of the loan, the interest rate on the loan, and other factors. These programs are designed to help low income graduates with significant loan balances. Some borrowers may be better off with higher, but fewer, monthly payments.
Keep in mind, these are proposed changes. Even if they get approved, Congress still must fund this program.
For more information on the REPAYE program changes, check out the U.S. Department of Education website or click here for a PDF fact sheet.
To discuss any of the topics in this blog or to learn more about how we can help you Cross The Bridge To A Confident Retirement, please contact me through my web site mikebranch.net, call me directly at 651-379-3935 or email me at mpbranch@focusfinancial.com.