Revised Income-Driven Repayment Plan for Undergraduates: The Most Generous Plan Yet

Updated on January 12, 2023

The Education Department has released a revised income-driven repayment plan for undergraduate student loans that offers the most generous repayment plan to date. Learn more about the new IDR plan, including key details, benefits, drawbacks, and when it will become available to borrowers

Summary

The Education Department has released details of a revised income-driven repayment plan for undergraduate student loans.
The draft rules propose the most generous repayment plan to date, with borrowers earning less than $30,600 individually, or less than $62,400 for a family of four, having $0 monthly payments.
Most other borrowers would see their payments reduced by at least half, and students who have borrowed less than $12,000 would have their remaining balances forgiven after 10 years of payments, instead of 20 to 25 years.
The new plan is a part of the Biden administration’s student loan relief effort and will provide long-term assistance to current and future college students.
The new plan will eventually replace four out of the five current IDR plans and is expected to be finalized later this year.
The cost of implementation is still being debated in Congress, and the Education Department has not yet announced when the new plan will become available to borrowers.
Income-driven repayment plans (IDR) are a type of student loan repayment plan that is based on the borrower’s income rather than the amount borrowed.
IDR plans are intended to provide relief to borrowers who are struggling to make their student loan payments by reducing the monthly payments to an amount that is more manageable based on their income.
However, IDR plans also come with drawbacks such as unpaid interest growing over time, resulting in an increase in overall debt.
The new IDR plan simplifies the repayment process for borrowers by reducing option overload and shelters more income for borrowers.

MORE: Biden’s Student Loan Forgiveness And What Is It About?

New Income-Driven Repayment Plan for Undergraduates: Key Details and Benefits

On Jan. 10, the Education Department released details of a revised income-driven repayment plan for undergraduate student loans. The draft rules, which are open for public comment, propose the most generous repayment plan to date. Borrowers earning less than $30,600 individually, or less than $62,400 for a family of four, would have $0 monthly payments. Most other borrowers would see their payments reduced by at least half. Students who have borrowed less than $12,000 would have their remaining balances forgiven after 10 years of payments, instead of 20 to 25 years.

The new plan, which is a part of the Biden administration’s student loan relief effort, would provide long-term assistance to current and future college students. Future borrowers would see their lifetime payments per dollar borrowed decrease by an average of 40%, compared to the current IDR options.

The new plan will eventually replace four out of the five current IDR plans, and it’s expected to be finalized later this year. However, the Education Department has not yet announced when the new plan will become available to borrowers, and the cost of implementation is still being debated in Congress.

MORE: Student Loan Forgiveness: US Cancels Another $2B In Debt

MORE: Navigating the Future of Student Loans: Key Questions and Answers

Simplifying the Repayment Process: How the New IDR Plan Reduces Option Overload

Income-driven repayment plans (IDR) are a type of student loan repayment plan that is based on the borrower’s income rather than the amount borrowed. These plans are intended to provide relief to borrowers who are struggling to make their student loan payments by reducing the monthly payments to an amount that is more manageable based on their income.

With an IDR plan, payments typically do not cover all the interest that accrues on the loan. This means that unpaid interest grows over time. After a certain number of payments, the remaining balance is forgiven. However, this unpaid interest can also lead to a significant increase in the borrower’s overall debt.

The interest accrual is one of the key triggers that can cause balances to become many times larger than the original debt, even after decades of payments. For example, if a borrower takes a month of forbearance, such as if they lose their job and need to skip a payment, they will not only see the skipped payment added back to their principal but also every penny of interest that accumulated over the years. This can cause the borrower’s overall debt to increase even more.

According to Daniel Collier, a University of Memphis assistant professor who specializes in student loan debt and income-driven repayment and tuition-free policy, “Current IDR programs are not optimal from the borrower perspective.” He goes on to say that “It seems like people are still massively struggling even being enrolled in IDR.”

In summary, IDR plans are a type of student loan repayment plan that can provide relief to borrowers who are struggling to make their payments by reducing the monthly payments to an amount that is more manageable based on their income. However, it also could cause the interest accrual to grow, increasing the overall debt. This is why some experts believe that IDR plans are not always the best option for borrowers.

MORE: How Income-Driven Repayment Plans Can Help You Manage Your Student Loan Payments

Drawbacks of Existing IDR Plans and How the New Plan Addresses Them

Simpler Repayment Choices

One of the major benefits of the new IDR plan is that it simplifies the repayment process for borrowers by reducing option overload. Currently, the government offers five different IDR plans, which can be confusing for borrowers. The new plan, which is a revision of the widely used Revised Pay As You Earn plan (REPAYE), will phase out or limit new enrollments in three other repayment plans. This simplifies the process and makes it easier for borrowers to understand and choose the best plan for them.

More Income is Sheltered

Another benefit of the new IDR plan is that it shelters more income for borrowers. Currently, the Education Department calculates IDR payments based on discretionary income, which is the borrower’s household income minus 150% of the federal poverty guideline for their family size and location. The new plan increases this threshold to 225% of the federal poverty guideline, which means borrowers will have more of their income sheltered and will pay less towards their student loan debt. For example, a household with an income of $75,000 and a family of four in Virginia will see their payments based on $12,572.50 of discretionary income under the new plan, rather than $33,375 under the current plan.

In summary, the new IDR plan simplifies the repayment process for borrowers and shelters more income, making it easier and more affordable for borrowers to repay their student loan debt.

Required Payment is Cut in Half

The new IDR plan brings significant changes to the monthly payment amount required of borrowers. Under the current IDR plans, borrowers are required to pay at least 10% of their discretionary income each month. However, the new plan proposes a significant reduction in this amount for borrowers with undergraduate loans. Under the new plan, borrowers with undergraduate loans will pay only 5% of their discretionary income each month.

This means that borrowers with undergraduate loans will see a significant decrease in their monthly payments. For example, a family with $75,000 in household income will see their monthly payment decrease from $278 to $52. This is a significant reduction that can help make repaying student loan debt more manageable for borrowers with undergraduate loans.

It’s worth noting that borrowers with only graduate school loans will still be required to pay 10% of their discretionary income each month, and those with both undergraduate and graduate loans would pay a weighted average between 5% and 10%. For example, the Education Department explained, “A borrower who has $20,000 in loans from their undergraduate education and $60,000 in loans from their graduate study would pay 8.75% of their income.”

In summary, the new IDR plan brings a significant reduction in the monthly payment amount for borrowers with undergraduate loans, which will help make repaying student loan debt more manageable for many. However, borrowers with only graduate loans will still have to pay 10% of their discretionary income and those with both undergraduate and graduate loans will pay a weighted average between 5% and 10%.

Forgiveness Comes Sooner

The new IDR plan brings a significant change in the forgiveness period for borrowers. Under the current IDR plans, borrowers are eligible for loan forgiveness after 20 or 25 years, regardless of how much money they borrowed for school. However, the new plan proposes to reduce the forgiveness period for certain borrowers. Specifically, the new plan would provide loan forgiveness after only 10 years for borrowers with original loan balances of $12,000 or less.

The reduction of the forgiveness period will have a significant impact on borrowers with smaller loan balances, especially community college borrowers. The Education Department projects that with this new plan, 85% of all community college borrowers will be able to achieve debt-free status within 10 years. This means that many borrowers with smaller loan balances will be able to achieve loan forgiveness much sooner than under the current IDR plans, which can provide a sense of financial relief and security.

In summary, the new IDR plan proposes to reduce the loan forgiveness period for certain borrowers, specifically those with original loan balances of $12,000 or less. This means that borrowers with smaller loan balances can achieve loan forgiveness much sooner, which is especially beneficial for community college borrowers, as 85% of them are projected to be debt-free within 10 years.

Unpaid Interest is Canceled

Currently, the Revised Pay As You Earn (REPAYE) plan payments does not fully cover the interest on a loan each month. This means that the unpaid interest is still accruing and growing over time. Under the existing plan, the government covers half of the unpaid interest, but the remaining interest continues to mount over time.

The new IDR plan makes a significant change in the way interest is handled. Under the new plan, the government would cover any unpaid interest each month as long as the borrower is making their monthly payments. This means that the unpaid interest would not accrue and grow over time, which can provide significant relief for borrowers struggling with interest accumulation on top of their principal balance.

In summary, the current REPAYE plan only covers half of the unpaid interest, leaving the remaining unpaid interest to accrue over time. Under the new IDR plan, the government would cover all unpaid interest each month as long as the borrower is making their monthly payments, thus preventing any accrual of unpaid interest over time.

Conclusion

In conclusion, the Education Department has released a revised income-driven repayment plan for undergraduate student loans that offers the most generous repayment plan to date. The new plan, which is a part of the Biden administration’s student loan relief effort, will provide long-term assistance to current and future college students, and will eventually replace four out of the five current IDR plans. The draft rules propose $0 monthly payments for borrowers earning less than $30,600 individually or less than $62,400 for a family of four, and most other borrowers would see their payments reduced by at least half. However, the cost of implementation is still being debated in Congress, and the Education Department has not yet announced when the new plan will become available to borrowers. The new IDR plan simplifies the repayment process for borrowers and shelters more income, however, it will be important to watch if the Government will be able to implement this plan and how it will impact the overall debt of the borrowers.

Questions Answered in this Article

What is an income-driven repayment plan for student loans? Answer: Income-driven repayment plans (IDR) are a type of student loan repayment plan that is based on the borrower’s income rather than the amount borrowed. These plans are intended to provide relief to borrowers who are struggling to make their student loan payments by reducing the monthly payments to an amount that is more manageable based on their income.
How do existing IDR plans work? Answer: With an IDR plan, payments typically do not cover all of the interest that accrues on the loan. This means that unpaid interest grows over time. After a certain number of payments, the remaining balance is forgiven. However, this unpaid interest can also lead to a significant increase in the borrower’s overall debt.
What are the drawbacks of existing IDR plans? Answer: The interest accrual is one of the key triggers that can cause balances to become many times larger than the original debt, even after decades of payments. For example, if a borrower takes a month of forbearance, such as if they lose their job and need to skip a payment, they will not only see the skipped payment added back to their principal but also every penny of interest that accumulated over the years. This can cause the borrower’s overall debt to increase even more.
What are the benefits of the new IDR plan? Answer: The new IDR plan brings several benefits for borrowers, including simplification of repayment choices and increased income sheltering. Repayment choices are simpler and more income is sheltered for borrowers.
When will the new IDR plan become available to borrowers? Answer: The Education Department has not yet announced when the new plan will become available to borrowers, and the cost of implementation is still being debated in Congress.