“We’re fixing a broken student loan system,” Education Secretary Miguel Cardona said on a call with reporters Monday. “We’re making a new promise to today’s borrowers and to generations to come. Student loan payments will be affordable. You won’t be buried under an avalanche of interest, and you won’t be saddled with a lifetime of debt.”
There are already four repayment plans that cap monthly bills at a percentage of a borrower’s earnings. Rather than create another, the Biden administration wants to amend an existing plan, known as Revised Pay As You Earn or REPAYE, and phase out new enrollment in the others. The proposal will be subject to a 30-day public comment period, with plans to finalize the rule later this year, according to the department. It will affect current and future loans.
Proponents argue that the existing suite of repayment options begs for common-sense reform that the proposed plan will deliver. Critics say it will incentivize students to borrow more with the promise of an easier path to loan forgiveness. It’s also unclear whether the Education Department can afford to implement the ambitious plan.
“Expansions of already generous repayment options, institutional shame lists, and other failed policies of the past won’t lower the cost of college for students and families,” said Rep. Virginia Foxx (R-N.C.), the chairwoman of the House Education Committee. “It does, however, turn the federal loan program into an untargeted grant with complete disregard for the taxpayers that fund it.”
The Committee for a Responsible Federal Budget, which advocates deficit reduction, estimates the income-driven plan will cost $138 billion over a decade.
Eight million people are enrolled in income-driven plans, and those plans extend repayment periods from the standard 10 years to as long as 25 years, with the promise of forgiving the balance at the end of that period. To enroll and remain in the programs, borrowers must submit information annually about their income and family size for monthly payments to be calculated. Payments are based on a percentage of discretionary income, typically whatever a person earns above 150 percent of the federal poverty line.
People have complained that the monthly loan payments are unmanageable and that the calculations fail to fully account for their living expenses.
To remedy those concerns, the Biden administration would:
- Increase the amount of income protected from repayment to 225 percent of the federal poverty guidelines. That means a single borrower earning less than $30,500 a year and a borrower in a family of four making less than $62,400 would not be required to make monthly payments on their loans, according to the department.
- The plan also would cap payments for undergraduate loans to 5 percent of a person’s discretionary income instead of 10 percent. Borrowers with debt from undergraduate and graduate studies would pay between 5 and 10 percent, according to a weighted average calculated from the share of what they originally borrowed for undergraduate studies. For example, someone who has $20,000 of undergraduate loans and $60,000 of graduate school debt would pay 8.75 percent of their discretionary income, according to the department.
- The new proposal also would stop the accumulation of unpaid interest. The idea is to prevent borrowers’ balances from growing because the payments the individuals can afford are lower than their accrued interest.
- The plan would also shorten the path to forgiveness for people with small balances. Those who borrowed $12,000 or less for undergrad or graduate school would receive loan forgiveness after making 10 years’ worth of payments, instead of 20 or 25 years’ worth. Every additional $1,000 borrowed above that amount would add one year of monthly payments to the time a borrower must pay before their debt is forgiven.
- The department is also proposing giving borrowers credit toward loan forgiveness for certain periods of deferments, including for military service, cancer treatment and unemployment.
- The agency would also automatically enroll borrowers who are at least 75 days behind on their payments in the income-driven plan that provides the lowest monthly payment and grant people in default access to earnings-based plans for the first time.
The proposed plan does exclude some borrowers. People with Parent Plus loans are shut out of the new plan, while everyone else with Direct Loans is eligible to enroll. Parents who’ve taken on federal debt for their children’s education can only enroll in what’s known as income-contingent repayment, which caps monthly bills at 20 percent of disposable income and forgives the remaining balance after 25 years. The limited options afforded to parents, some of whom struggle to repay the debt as they near retirement, have been a point of contention among advocates.
Senior administration officials told reporters the Higher Education Act states that Parent Plus loans are not eligible to be repaid on an income-driven plan, with the exception of consolidation loans that repaid a Parent Plus loan. The department is not proposing changes to those long-standing treatments.
Abby Shafroth, the director of the National Consumer Law Center’s Student Loan Borrower Assistance Project, said the exclusion of Parent Plus loans from the plan is “denying many low-income parents the opportunity to break free of student debt in their lifetime.” Although she praised elements of the proposal, Shafroth said it does not go far enough. Most borrowers, she said, will remain in debt for 20 or 25 years and face a big tax bill when their balance is finally forgiven.
“In the final rule, the department should provide a more complete solution by writing off the difference between the borrower’s income-adjusted payment and what their payment would be on a standard repayment plan, allowing borrowers to make steady progress toward being debt free,” Shafroth said.
Undersecretary of Education James Kvaal touted the benefits of the proposed plan, which he said would “transform college financing and reduce future borrowers’ total payments per dollar by $0.40 while targeting that help on low- and middle-income borrowers.”
But the Education Department will face hurdles in implementing the plan. Congress flat-funded the Office of Federal Student Aid in the fiscal 2023 budget, leaving the office strapped for cash to carry out new loan servicing contracts, policy initiatives and rulemaking.
“We were very disappointed with the level of funding we received from Congress for Federal Student Aid, and that’s going to make it a challenge for us to carry out a number of our policy initiatives,” a senior department official said. “We’re currently working through the full impact of the funding level . . . and again, our goal is to implement this IDR plan in 2023.”
In addition to the new income-driven rule, the Biden administration on Tuesday said it is publishing a request for information to seek formal public feedback on the best way to identify programs that provide the least financial value for students. The request begins to address Biden’s pledge in August to hold colleges accountable for contributing to the student debt burden. The Education Department said it also hopes to publish its update of the gainful employment rule, which threatens to withhold federal financial aid from colleges that saddle students with more debt than they can afford, this spring.
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