Proposed Income-Driven Repayment Changes May Make Student Loan Payments More Manageable
The Department of Education proposed significant changes to the income-driven repayment (IDR) plans on January 11, 2023. The goal of these changes is to make payments more affordable for many federal loan borrowers, allow lower balance borrowers to get out of debt quicker, and to streamline the various IDR plans—which are complex and often confusing for borrowers.
The proposed IDR highlights:
- Instead of adding another IDR plan, the intent is to amend the Revised Pay As You Earn (REPAYE) plan to create a plan that will be ideal for most borrowers—this is being referred to as modified REPAYE.
- In an effort to streamline the IDR plans, they are also proposing to phase out the use of the Pay As You Earn (PAYE), Income-Contingent Repayment (ICR), and limit the use of Income-Based Repayment (IBR).
- Borrowers already using these plans will be allowed to remain in those plans if they prefer. Some graduate loan borrowers may want to stay in PAYE or New IBR (new borrowers after 6/30/2014) if they are seeking IDR forgiveness after 20 years instead of 25. However, the monthly payments may calculate lower under the modified REPAYE plan.
- All Parent PLUS loan borrowers will still be able to use ICR once their loans are consolidated. Unfortunately, the amended REPAYE plan will not allow Parent PLUS loan borrowers to enroll.
- Time in certain deferment and forbearances will count toward IDR forgiveness. IDR forgiveness is when a borrower is in repayment in an IDR plan for a long period of time and the remaining balance is forgiven, typically after 20 or 25 years.
- This includes economic hardship deferment, unemployment deferment, and administrative forbearance, among others, but not in-school deferment or general forbearance.
- The proposal also includes giving borrowers a chance to make payments during periods of deferment or forbearance in order to give them the chance to get that time counted towards forgiveness. This can be beneficial for students who have gone back to school and are in an in-school deferment, but want to keep paying their prior loans.
- This plan allows defaulted borrowers to pay under an IBR plan and have that time counted towards IDR forgiveness.
- Borrowers who have qualifying IDR payments will not have their forgiveness progress reset by federal loan consolidation. If borrowers consolidate loans that have different counts of qualifying payments, they will be given credit for a weighted average payment count.
- Increase the income protected from the calculation from 150% to 225% of income beyond the poverty line, based on the borrower’s state. This means that a single borrower in the contiguous 48 states earning slightly over $30,000 or a family of four earning slightly over $62,000 would have $0 monthly payments under modified REPAYE.
- Currently, REPAYE is the only IDR plan that always considers the spousal income for married borrowers, but the modified REPAYE will allow borrowers to file their taxes separately to exclude their spouse’s income.
- The percentage of discretionary income used to calculate loan payments will be updated from 10% across the board to:
- 5% for undergraduate loans
- 10% for graduate loans
- Weighted average between 5-10% for borrowers with both undergraduate and graduate loans
- Early IDR forgiveness for borrowers will smaller balances. The proposal includes dropping the time to IDR forgiveness to 10 years for loans with an original balance of $12,000 or less. And increase the time by one year for each additional $1,000. The maximum time remains at 20 years for borrowers with only undergraduate loans and 25 years for those with graduate loans.
