Enrichment Education

How Biden’s debt forgiveness plan could transform income-driven repayment

President Biden announced a new income driven repayment plan that would limit the amount of interest borrowers with undergraduate loans have to pay, increase the amount of income protected as discretionary income, and speed up the timeline for loan forgiveness.
President Joe Biden speaks about student loan debt forgiveness in the Roosevelt Room of the White House on Aug. 24, 2022. Education Secretary Miguel Cardona listens at right. AP Photo/Evan Vucci

Story at a glance

  • Within President Biden’s historic student debt forgiveness announcement was a critical addition to income-driven repayment (IDR) plans.

  • Biden proposed a new IDR plan that would let the federal government cover a borrower’s unpaid monthly interest.

  • The Education Department would also be allowed to forgive loans once they hit 10 years for those with undergraduate federal loans that had original balances of $12,000 or less.

Student loan borrowers now and in the future could have access to a new income-driven repayment plan that would help prevent balances from ballooning over time, thanks to a proposed rule within President Biden’s historic student debt forgiveness announcement. 

Biden’s proposed plan starts with limiting monthly payments to 5 percent of a borrower’s discretionary income, forgiving outstanding loan balances after 10 years for borrowers whose initial balances were less than $12,000 and having the federal government cover unpaid monthly interest. 

About 1 in every 3 borrowers with government-issued student loans are already enrolled in some form of income-driven repayment (IDR). The plans, of which there are four, are meant to financially protect borrowers and make loan debt more manageable with monthly payments based on a certain percentage of income. 

“We’re delivering targeted relief that will help ensure borrowers are not placed in a worse position financially because of the pandemic, and restore trust in a system that should be creating opportunity, not a debt trap,” said Secretary of Education Miguel Cardona, in a statement in August. 

Creating more affordable loan payments, IDR plans have become critical for millions of borrowers. The change, which is currently under draft rule and available for public comment for 30 days before moving forward, aims to offer even more financial relief.  

The new IDR plan would: 

Cut monthly payments in half 

To date, most IDR plans require payments of 10 percent of a borrower’s discretionary income. Any remaining loan balances are forgiven after 20 years. 

Though IDR was designed to make student loan repayments affordable, in many cases the opposite happens. 

An analysis by the Brookings Institution noted that the formula for setting IDR monthly payments only reflects income and family size, not regional differences in the cost of living or other expenses borrowers may have. 

This formula has resulted in many borrowers not making large enough monthly payments to cover the cost of their loans’ principal balance plus accrued interest, leading to balances growing to insurmountable levels over time.  

The new proposed IDR plan aims to tackle the formula that determines a borrower’s monthly payment by raising the amount considered to be one’s discretionary income and protecting it from repayment.  

That’s achieved by lowering monthly payments to just 5 percent of borrowers with undergraduate loans’ discretionary income — currently IDR plans set monthly payments at 10 percent. 

The White House also says it will guarantee that no borrower earning under 225 percent of the federal poverty line — which is equivalent to a $15 minimum wage salary for a single borrower — will have to make a monthly payment toward their undergraduate student loans.  

Rein in compounding interest 

Interest has played an outsized role in the student debt crisis and under current IDR plans, millions of borrowers see their loan balances balloon. That’s because interest will continue to accrue and add to any outstanding loan balance even if someone makes their monthly payment. 

Biden hopes to change that by having the federal government cover a borrower’s unpaid monthly interest so no loan balance will grow so long as monthly payments are being made. 

Student debt expert Mark Kantrowitz told Changing America that this approach doesn’t completely cancel interest, but it simply forgives remaining interest balances after a borrower’s payment is applied — resulting in no interest capitalization on loans for borrowers enrolled in the new IDR plan. 

“The interest benefit is more of a psychological benefit than real savings for borrowers who experience economic distress, since the interest would have been forgiven eventually anyway,” Kantrowitz said. “But it prevents the student loan balance from increasing, which is a source of student loan stress.” 

Speed up loan forgiveness 

Under the new plan, the Education Department could also forgive eligible loans once they hit 10 years, but only for those with undergraduate federal loans with original balances of $12,000 or less. Currently, IDR plans offer forgiveness at the 20-year mark. 

Though it would cut in half the amount of time and money owed to forgive a loan, this aspect of the plan would likely only affect a limited number of people.  

Kevin Miller, associate director of higher education at the Bipartisan Policy Center, explained that most borrowers have balances around $30,000, which would exclude most bachelor’s degree recipients from eligibility for loan forgiveness after 10 years. 

“I suspect that part of the motivation here was to try and provide a shorter timeline for forgiveness for people who dropped out of college with a limited amount of debt,” Miller said to Changing America. 

Miller also noted that since the federal loan system does not automatically enroll borrowers in repayments plan they may be eligible for, “there’s a lot of borrowers who probably won’t engage with this new plan.” 

What critics are saying 

Some critics point out that Biden’s IDR proposal does little to address the problem of soaring tuition costs and would enable student borrowers to attend schools they can’t afford. It could even incentivize universities to raise tuition, as some borrowers may have the option to cap their monthly payments after graduation at 5 percent over a 10- or 20-year period.  

Miller also voiced concern that the proposed plan could lead colleges and universities to recommend students take out more loans.  

“While IDR plans are great for preventing defaults, they aren’t necessarily great for people actually being able to repay their debt,” Miller said.  

The average cost to attend college in 2022, including books, supplies and living expenses, is more than $35,500 per year. Data shows that the cost of attendance has doubled in the 21st century, growing by 6.8 percent annually.