What is Joe Biden’s new plan to cut undergraduate student loan payments in half?

The White House seemed prepared for the Supreme Court’s decision blocking the Department of Education from cancelling up to $20,000 of federal student loan debt for eligible borrowers. Shortly after the ruling was released on Friday, President Biden flanked by his Education Secretary Miguel Cardona announced that his administration was taking a new path toward student loan forgiveness.

Also, the finalized structure of a new Income-Driven Repayment (IDR) plan was posted on the Federal Student Aid website called the Saving on a Valuable Education (SAVE) plan. The concept of the SAVE plan was announced in January, which will replace the Revised Pay As You Earn (REPAYE) plan, is touted as being “the most affordable repayment plan in history.”

The SAVE plan will reduce monthly payments for borrowers, to zero for those that meet the income requirements. At the same time, it will prevent unpaid interest from accumulating as long as repayments are made on time.

It will also shorten the amount of time that borrowers need to make monthly payments to as little 10 years before an outstanding debt is cancelled. This could be the case for 85 percent of community college borrowers after entering repayment according to the Department of Education.

“We cannot return to the same broken system we had before the pandemic, when a million borrowers defaulted on their loans a year and snowballing interest left millions owing more than they initially borrowed,” said Cardona at the time.

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Reduced monthly student loan payments

The new plan from the White House will amend the terms of the Revised Pay As You Earn (REPAYE). The proposed regulations would increase the amount of income protected from repayment from 150 percent of the Federal poverty guidelines to 225 percent. That level is roughly the equivalent of a $15 hourly wage based upon the 2022 guidelines for a single borrower working fulltime.

So, a single borrower earning less than $32,800 would have their monthly payments reduced to zero dollars. The same would be true for a borrower in a household of four with an annual income below $67,500. Under the most generous current income-driven repayment (IDR) plans the amounts are around $20,400 and just above $41,600 respectively.

The thresholds will be higher in Hawaii and Alaska and those whose income exceeds them could see savings of at least $1,000 per year compared to other IDR plans. This is because under the new plan, the amount that borrowers would be required to pay above the increased level of 225 percent will be half of the most generous IDR plan. Payments on loans borrowed for undergraduate studies will be reduced to just five percent of discretionary income. Those who have both undergraduate and graduate loans will pay a weighted average of between 5 percent and 10 percent of their income based on the original principal balances.

To ensure that borrowers enrolled in these repayment plans don’t continue to see their balances grow month after month, the new regulations will stop unpaid interest from accumulating if monthly payments are made. That includes those who qualify for zero-dollar monthly payments.

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Faster path to student loan debt forgiveness

Under current IDR plans, regardless of the amount borrowers owe in student loan debt, a balance can be canceled after 20 years for undergraduate loans and 25 years for graduate loans. The new regulations seek to slash the amount of time borrowers are beholden to their student loan debt.

Those enrolled in income-based repayment plans whose original loan balances were $12,000 or less will have the outstanding amount cancelled after 10 years of payments. One year will be added for every $1,000 above that threshold to achieve debt forgiveness.

According to the Education Department, this measure will be particularly beneficial to borrowers who took our federal student loans to attend community college, making 85% of them debt free within 10 years of entering the repayment program.

Furthermore, “the final rule will make it easier for borrowers to navigate repayment by eliminating common pitfalls to forgiveness and protecting at risk borrowers,” according to the Education Department’s fact sheet. These include automatically putting a borrower into a SAVE plan if they 75 days without making a payment.