Fri, 24 Mar 2023

On Tuesday Jan 10th, The Education Department announced a proposal for a new form of student loan relief, as part of President Biden's broader student loan debt plan.

The new plan would mean that millions of borrowers could cut their monthly student loan debt payments by more than half, would wipe out the remaining balance after 10 years for some borrowers, and would result in many borrowers paying as low as zero on their monthly payments.

Unlike Mr. Biden's previous one-time, selective initiative that aimed to cancel up to $20,000 in federal debt, an initiative beset by legal challenges, the new repayment plan aims to restructure one the Education Department's existing income-driven payment plans, the Revised Pay As You Earn (REPAYE) plan.

Under REPAYE the borrower's monthly payments are tied to income and size of family, with remaining debt forgiven after a set number of years. The latest iteration of REPAYE is set to be the most affordable of the five existing plans.

Income-based repayment plans are in place to ease pressure when debtors are unable to afford their monthly bill. Around a third of borrowers in repayment, about 8.5 million people, are enrolled in one of the existing plans. These income-driven plans all tend to work in the same way.

Payment is calculated based on earning and household size, and readjusted every year. Once monthly payments have been made for a set number of years (usually 20), the remaining balance is forgiven.

With the latest proposal the Biden administration is hoping to simplify plan choices by phasing out, or limiting, enrollments into the other four existing plans. It has proposed gradually removing new enrollments into the PAYE and ICR plans, and limiting circumstances in which a borrower can switch into the IBR plan.

The newly revised REPAYE plan is set to be the most generous plan so far. Let's get into the specifics of exactly how that is the case.

The new program would base payments on 5% of the borrower's discretionary after-tax income. This would be a reduction from the current program that bases payments on 10% or 15% of the borrower's discretionary income. Therefore, for most borrowers, this would cut current payments in half.

The new proposal would also change minimum income requirements for repayment. As it stands, those who earn less than 150% of the federal poverty level, about $21,900, would qualify for REPAYE. The new proposal stipulates that borrowers would only have to make payments when their income reaches 225% of the federal poverty guideline, about $32,800. So anyone earning less than that would qualify for a zero monthly payment.

Like the current program, after 20 years of successful payment, the whole balance will be forgiven. And for those with loans less than $12,000, who pay regularly to the new plan, the balance is forgiven after 10 years.

And, in what will be a boon to younger married couples, the new plan stipulates that only the income from the individual borrower will be counted when repayment is calculated. In previous iterations of REPAYE and the other income-based plans, family income was the metric used for calculating required payments.

When it comes to federal income taxes, it has yet to be determined whether they will apply on the amount forgiven. This is the current situation until 2025.

Furthermore, under the new plan no unpaid interest is added to the balance if payments are made on time. This cuts the 'snowball effect' of interest-on-interest adding to existing balances.

This is seen to be the really significant aspect of this plan, as many current borrowers have to deal with both high interest rates and compounding of debt. This means that they may have even paid off original borrowing, but still owe twice as much in unpaid interest. So under the new plan, loan balances will not increase or 'snowball' as interest is accrued.

If approved, the new plan could lessen the stress of loan repayments for millions of student loan borrowers in the country.

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