Biden shifts to Plan B with another student debt relief program

The Biden administration, with its ambitious plan to provide up to $20,000 in student loan relief to millions of Americans in legal limbo, this week announced Plan B: The new plan, which is called the Revised Pay As You Earn (REPAYE) program, is actually an overhaul of a student loan program first introduced in 2016.

The strategy features income-driven repayment plans, or IDRs, which are designed to help make student loans more manageable by tying a person’s monthly payment to their income. About one-third of all borrowers are enrolled in an IDR, according to Pew Research.

Even if the debt-forgiveness effort is struck down by the courts, the Department of Education’s new plan could help borrowers by overhauling IDRs, CBS News reported. The plan addresses some of the worst features of student debt, such as “negative amortization,” when a loan balance keeps growing despite consistent payments.

“We’re fixing a broken student loan system,” Education Secretary Miguel Cardona said. “We’re making a new promise to today’s borrowers and to generations to come. Student loan payments will be affordable. You won’t be buried under an avalanche of interest, and you won’t be saddled with a lifetime of debt.”

Related: Supreme Court will hear 2nd challenge to Biden student debt relief plan in February

However, critics have pointed out that IDRs have some major pitfalls. First, there are four such plans, each with its own rules and criteria, which can be a headache for borrowers to navigate. The plans also have been criticized for allowing student debt to grow through negative amortization, with one report from the Student Borrower Protection Center noting that some borrowers have seen their college loan obligations double or triple despite being in a repayment plan.

Biden administration officials said they will mostly phase out three of the IDR plans and focus on one program that it intends to simplify and make more generous. Under the proposed changes, REPAYE will increase the amount of income that is protected from debt repayment:

• Currently, enrollees must make payments equal to 10% of their discretionary income, which is set at earnings above 150% of the federal poverty guidelines. That means only $20,400 of income for a single borrower is considered nondiscretionary and therefore protected from IDR plans.
• The proposal would boost the amount of nondiscretionary income for single borrowers to about $31,000, or 225% of the federal poverty threshold. That means more of a borrower’s income would be shielded from going toward debt repayment, providing more money for necessities such as rent or food.

The proposal will also halve the percentage of discretionary income that borrowers must repay, with the share declining to 5% from the current 10%. The proposal would eliminate the issue of negative amortization.

“Under the proposed plan, a borrower would continue to have their monthly payment first applied to interest, but if it is not sufficient to cover that amount, any remaining interest would not be charged,” the Education Department said in a statement.

The proposal also makes some changes to loan forgiveness, shortening the time for people with student debt to get relief. Current plans promise to cancel any remaining debt after 20 or 25 years of payments. The new regulations would erase all remaining debt after 10 years for those who took out $12,000 or less in loans. For every $1,000 borrowed beyond that, a year would be added.

Overhauling IDR plans could cost as much as $190 billion, according to the Committee for a Responsible Federal Budget, a public policy group that pushes for lower government debt.

The Education Department said it expects to finalize the rules later in 2023 and believes it can start implementing some provisions sometime this year. Employers also now can choose to make contributions to retirement accounts based on an employee’s student loan payments under the newly implemented SECURE 2.0 Act.