The Biden administration has quietly named a new repayment plan for student loan borrowers that would be based on their income. But key details must still be hammered out.
Student Loan Income Based Repayment Plans: How They Work Now
Income-Driven Repayment (IDR) plans — a broad term that describes a collection of similar plans that base a student loan borrower’s monthly payment on their income and family size — can be a crucial option for borrowers, and sometimes these plans are the only way a borrower can have a manageable monthly student loan payment. IDR plans include Income Contingent Repayment (ICR), Income Based Repayment (IBR), Pay As You Earn (PAYE), and Revised Pay As You Earn (REPAYE).
IDR plans rely on a formula applied to the borrower’s income (typically their Adjusted Gross Income, or AGI, on their federal tax return) and family size to calculate their monthly payment. Payments are based on what’s known as a borrower’s “discretionary income” — which, for purposes of these plans, is defined as the amount of the borrower’s AGI above a 100-150% of the federal poverty exemption, depending on the specific plan, adjusted for family size. Monthly payments are typically 10% to 20% of a borrower’s monthly discretionary income (20% for ICR, 15% for IBR, and 10% for PAYE and REPAYE).
Payments under IDR plans last for 12 months and must be renewed annually based on a borrower’s updated income documentation — typically their most-recently filed federal tax return. Changes to a borrower’s income would likely lead to changes to their monthly IDR payment for the following 12 months. After 20 or 25 years (depending on the plan), any remaining balance would be forgiven, although this could be considered taxable “income” to the borrower. Congress included a provision in the American Rescue Plan that exempts student loan forgiveness from federal taxation through 2025, but this provision would have be extended or made permanent to benefit most borrowers who are in an income-driven repayment plan.
Biden’s New Income-Driven Repayment Plan For Federal Student Loans
This week, the Education Department unveiled a new IDR plan, tentatively called the “Expanded Income-Contingent Repayment” (EICR) Plan, in a negotiated rulemaking session. Negotiated rulemaking is the process by which the Department can revamp existing regulations to overhaul key federal student loan programs. The Department is reviewing a wide array of federal student loan programs through the negotiated rulemaking process, and part of this week’s focus has been the creation of a new income-driven repayment plan under federal rules.
Aside from the name, however, there are few details about EICR, because the negotiated rulemaking committee — comprised of key stakeholders including student loan borrowers, financial aid administrators, colleges and universities, individuals with disabilities, legal services organizations, military service members, and lenders — must reach a consensus on what the program is going to look like, and that is going to take time. However, the Department is considering several key elements of EICR:
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- Eligible student loans. Currently, all of the existing income-driven plans have different loan eligibility criteria. Some plans (ICR, PAYE, and REPAYE) are limited to Direct loans only. The PAYE plan has restrictions based on a loan’s disbursement date. Parent PLUS loans are excluded from most of the income-driven plans. The Department has not yet determined which loans will be eligible for EICR.
- Treatment of married borrowers. The IBR, PAYE, and ICR plans allow married borrowers to exclude spousal income by filing taxes as married-filing-separately. REPAYE, however, factors in the combined income of married borrowers regardless of their tax filing status. Rulemakers must determine how EICR will treat married borrowers.
- Payment amounts. The existing income-driven plans use different formulas to determine a borrower’s monthly payment. These formulas apply a poverty exemption to exclude an initial amount of income, then base the payment on a percentage of a borrower’s AGI about that exclusion. Rulemakers must consider how large a poverty exclusion will be for EICR, and what percentage of a borrower’s remaining income should be counted. Interestingly, the Department is considering a “marginal” approach to EICR repayment, where wealthier borrowers pay a larger percentage of their income than lower-income borrowers. None of the existing IDR plans adopt this payment calculation method.
- Interest Benefits. During periods when monthly income-driven payments are lower than the amount of monthly interest accrual, a borrower’s overall balance can grow significantly due to negative amortization. The Department proposes an interest subsidy for EICR that would reduce interest accrual during times when calculated EICR payments are $0, but rulemakers would need to determine the extent of that subsidy.
- Repayment term. The existing IDR plans have either a 20-year or 25-year repayment term, depending on the plan. The Department of Education appears to be considering a 20-year EICR term for undergraduates, but a 25-year term for borrowers who take out a loan for a graduate degree program. This is similar to how the REPAYE plan operates. The Department is considering counting certain deferments and forbearances towards the repayment term.
Negotiated rulemaking is a long, complicated process that requires a series of public hearings. Committee members must reach consensus to finalize changes to federal student loan programs. It will likely take a year or longer for any regulatory reforms to be finalized.
Lawmakers and advocates for student loan borrowers have urged the Biden administration to simplify and streamline the complicated IDR system by creating a single new IDR plan that is open to all federal student loan borrowers and all kinds of federal loans, has a larger poverty exemption than existing IDR plans, and caps payments at 10% of a borrower’s discretionary income for no more than 20 years. It remains to be seen whether EICR would accomplish those goals.
Negotiated rulemaking hearings are open to the public. The next session will be December 6-10. Individuals may participate in any of these hearings and can request an opportunity to comment; to participate, you can register here.