Everything You Need to Know About Student Loan Repayment Changes

A new student loan repayment plan can make debt repayment much easier for current and future borrowers.

On Tuesday, President Joe Biden's administration announced an overhaul proposal. A series of changes to federal law will go into effect later this year, making the program the best option for the vast majority of borrowers.

Borrowers currently have four different IDR plans, and the proposal could significantly reduce the financial burden they face by lowering payments and offering forgiveness options.

The changes to the REPAYE plan are part of a larger effort by Biden to help curb it. In theory, the new repayment plan could be combined with the loan, but the program is on hold until the Supreme Court rules on legal challenges raised shortly after the loan forgiveness program was announced in August. The pause on interest and required payments on federal loans has been extended during the pandemic.

The proposed REPAYE changes would have a major impact on borrowers' finances alone and reduce overall student loan repayments for future borrowers by 40%, the Department for Education estimates.

Here's how the student loan system is changing and how it could affect your finances if you're a current student loan borrower or planning to take out a loan to pay for college.

Payments will be reduced by more than half.

Borrowers enrolled in the new REPAYE plan will never have to pay more than 5% of their discretionary income toward undergraduate student loan payments, compared to a maximum of 10% under current rules. Not only that, but “discretionary income” could be defined more generously, as it would be more than 225% of the federal poverty line, compared to 150% today.

If your income is low enough, you won't have to pay anything. Under the current rules, those with $0 monthly payments will still be considered to have progressed toward final forgiveness.

The department estimates the changes would require a typical graduate of a public four-year university to pay $2,000 less per year on student loans.

Loans can be forgiven after 10 years.

For borrowers of $12,000 or less, your loan will be forgiven after 10 years as long as you make regular payments. That's half of the 20-year grace period under the current plan.

For every $1,000 over that amount, you'll have to pay an additional year, up to a maximum of 20 years, or 25 years if you have a higher education loan. Then, as per the current rules, your remaining loan balance will be forgiven regardless of how much or how little you pay.

The changes will especially help community college students, 85% of whom will see their loans wiped out after paying for 10 years or less, the department estimated.

Your credit balance will not increase as long as you make payments.

As long as you make your payments under the new plan, your loan balance will not increase, even if your payment amount does not cover the interest generated by your loan or if you pay $0. Apparently, 70% of borrowers with income-driven repayment plans see their loan balances increase steadily over time because their payments are less than interest.

The focus is on students' undergraduate credits.

However, the changes to the REPAYE plan do not cover all types of student loans.

The 5% discretionary income cap on fees applies only to undergraduate loans, not graduate loans.

still cannot be combined to qualify for the MEETING plan under the proposal. Instead, they can still switch to the older and less generous Income Conditional Payment plan.

Critics say the plan would make college more expensive.

Critics of the proposal say it could encourage students to overspend on education, driving up college costs and costing taxpayers hundreds of billions of dollars.

The proposed rules are so generous that students will have little incentive to limit tuition costs, the responsible Federal Budget Committee, an anti-deficit think tank, said in a statement.

“Today's IDR rule risks turning the student loan system into an arbitrary grant program that creates more confusion than unity and creates a series of perverse incentives that drive students to take on massive amounts of debt and colleges to charge ever more expensive tuition.” in his statement.

Student loan advocates say it doesn't go far enough.

The proposed set of changes will help many borrowers, but should be expanded to include Parent PLUS loans and graduate student loans, the Student Borrower Advocacy Center, a nonprofit that advocates for student loan borrowers, said in a statement.

“Equity requires that these borrowers have equal access to an affordable repayment plan and the necessary supports to escape the crushing weight of student debt. The Secretary should include them in the final rule,” SBPC Deputy Executive Director Persis Yu said in a statement.

This is not a done deal.

The department said it may make changes to the proposal based on public input before it starts later this year.

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