Education Department names new income-based plan for student loans, but details are slim
The Biden administration quietly named a new repayment plan for student loan borrowers that would be based on their income. But the key details have yet to be worked out.
Income-Based Student Loan Repayment Programs: How They Work Now
Income-Based Repayment Plans (IDRs) – a broad term that describes a collection of similar plans that base a student loan borrower’s monthly payment on their income and family size – can be a crucial option for borrowers, and sometimes these plans are the only way a borrower can have a manageable monthly student loan payment. IDR plans include Conditional Income-Based Reimbursement (ICR), Income-Based Reimbursement (IBR), Pay As You Earn (PAYE), and Revised Pay As You Earn (REPAYE) ).
IDR plans rely on a formula applied to the borrower’s income (usually their adjusted gross income, or AGI, on their federal income tax return) and family size to calculate their monthly payment. Payments are based on what is known as a borrower’s ‘discretionary income’ – which, for the purposes of these plans, is defined as the borrower’s AGI amount greater than 100-150% of the borrower’s income. Federal poverty exemption, according to the specific plan, adjusted for family size. Monthly payments are typically 10-20% of a borrower’s monthly discretionary income (20% for ICR, 15% for IBR, and 10% for PAYE and REPAYE).
Payments under IDR plans last 12 months and must be renewed annually based on the borrower’s updated income documentation – typically their latest federal tax return. Changes in a borrower’s income would likely result in changes to their monthly IDR payment for the next 12 months. After 20 or 25 years (depending on the scheme), any remaining balance would be written off, although this could be considered taxable “income” to the borrower. Congress included a provision in the American Rescue Plan that exempts student loan forgiveness from federal tax until 2025, but this provision would have been extended or made permanent for the benefit of most borrowers who are in a plan. income-oriented repayment scheme.
Biden’s new income-driven repayment plan for federal student loans
This week, the Education Department unveiled a new IDR plan, tentatively called the “Expanded Income Based Reimbursement” (EICR) plan, in a negotiated rule-making session. Negotiated Rules Development is the process by which the Department can reorganize existing regulations to revise major federal student loan programs. The department is reviewing a wide range of federal student loan programs through the negotiated rule-making process, and part of the focus this week has been on creating a new income-based repayment plan. under federal rules.
Other than the name, however, there are few details on the EICR, as the negotiated rule-making committee – made up of key stakeholders including student loan borrowers, financial aid administrators, colleges and universities, people with disabilities, legal service organizations, military service members and lenders – need to come to a consensus on what the program will look like, and it will take time. However, the Ministry is considering several key elements of the EICR:
- Eligible student loans. Currently, all of the existing income-oriented plans have different loan eligibility criteria. Some plans (ICR, PAYE and REPAYE) are limited to direct loans only. The PAYE plan has restrictions based on the date a loan is disbursed. Parent PLUS loans are excluded from most income-oriented plans. The Ministry has not yet determined which loans will be eligible for the CEI.
- Treatment of married borrowers. The IBR, PAYE, and ICR plans allow married borrowers to exclude spousal income by filing taxes separately. REPAY, however, takes into account the combined income of married borrowers, regardless of their tax status. Lawmakers need to determine how the EICR will treat married borrowers.
- Payment amounts. Existing income-oriented plans use different formulas to determine a borrower’s monthly payment. These formulas apply a poverty exemption to exclude an initial amount of income, then base the payment on a percentage of a borrower’s AGI for that exclusion. Policymakers need to take into account the extent of poverty exclusion for the EICR and the percentage of a borrower’s remaining income that needs to be taken into account. Interestingly, the Department envisions a “marginal” approach to EICR repayment, where wealthier borrowers pay a higher percentage of their income than low-income borrowers. None of the existing IDR plans adopt this method of calculating payments.
- Interest benefits. During times when monthly income-related payments are less than the amount of monthly interest accrued, a borrower’s overall balance can increase significantly due to negative amortization. The Ministry is proposing an interest subsidy for the EICR that would reduce accrued interest during periods when the calculated payments for the EICR are $ 0, but lawmakers should determine the extent of this subsidy.
- Repayment period. Existing IDR plans have a repayment term of 20 or 25 years, depending on the plan. The Department of Education appears to be considering a 20-year EICR term for undergraduates, but a 25-year term for borrowers who take out a loan for a graduate program. This is similar to how the REPAYE plan works. The Ministry plans to include certain postponements and abstentions in the reimbursement period.
Developing negotiated rules is a long and complicated process that requires a series of public hearings. Committee members must reach consensus to finalize changes to federal student loan programs. It will likely take a year or more for regulatory reforms to be finalized.
Lawmakers and student loan borrower advocates have urged the Biden administration to simplify and streamline the complicated IDR system by creating a unique new IDR plan that is open to all federal student loan borrowers and all kinds of federal loans , has a greater poverty exemption than existing IDR Plans and caps payments at 10% of a borrower’s discretionary income for up to 20 years. It remains to be seen whether the EICR will achieve these goals.
The negotiated rule-making hearings are open to the public. The next session will take place from December 6 to 10. Individuals can participate in any of these hearings and can request the opportunity to comment; to participate, you can register here.
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