New Student Loan Repayment Changes Announced: Here’s What Borrowers Need To Know

Topline

The Biden Administration announced proposals Tuesday that aim to ease the burden on federal student loan borrowers based on their income levels, as the White House prepares to resume student loan payments in the coming months and the future of its student loan forgiveness program hangs in the balance at the Supreme Court.

Students from George Washington University wear their graduation gowns outside of the White House in ... [+] Washington, DC, on May 18, 2022.

AFP via Getty Images

Key Facts

The administration proposed changes to the Revised Pay As You Earn (RPAYE) plan for federal student loan borrowers, which now requires borrowers to make monthly payments of 10% of their “discretionary” income, which starts at 150% of the federal poverty guidelines (about $20,400 annually).

Under the new guidelines, income will be protected up to 225% of the federal poverty guidelines, meaning any individual who earns less than $30,500 or borrower in a family of four who makes less than $62,400 will not be required to make monthly payments.

For those with undergraduate loans who earn more than that, monthly payments will drop from 10% of discretionary income to 5%, cutting borrowers’ payments in half—though graduate school loans will remain at 10%, and borrowers with loans for both will pay a weighted average based on how much they owe.

The regulations will curb the amount of accrued interest added to borrowers’ balances, and borrowers who make regular monthly payments will not see their balance still increase as a result of interest.

The timeframe for when borrowers will have their remaining loans forgiven has been shortened: Borrowers will have their loans forgiven no later than after 20 years of payments for undergraduate loans and 25 years for graduate loans, but those with $12,500 or less in loans can have them forgiven after 10 years, and every $1,000 owed above that will add one additional year of payments before loans are forgiven (up to the 20 or 25 year mark).

The Biden Administration is also adding circumstances for when loan deferments and forbearances can still be counted toward student loan forgiveness—like deferring payments due to cancer treatment or military service—and making it easier for borrowers who have defaulted on their loans to be enrolled in an income-driven repayment plan.

What To Watch For

The Department of Education said the agency will publish its proposed regulations in the Federal Register on Wednesday, and there will be a 30-day public comment period for opinions on the new guidelines. It’s still unclear when the new policies will take effect, as the agency said only that it aims to finalize the regulations and start putting “some provisions” into effect “later this year.” That will likely be after student loan payments resume after they’ve been on pause throughout the pandemic: the Biden Administration announced in November that payments will resume 60 days after June 30 of this year, unless the Supreme Court allows its student loan forgiveness program to take effect again sooner than that (in which case it will be 60 days after that).

Big Number

40%. That’s how much borrowers’ average lifetime payments should fall under the new regulations, as compared with the current RPAYE plan, the Biden Administration projects. Borrowers with the lowest projected lifetime earnings should see a reduction of up to 83% in lifetime payments on the borrowed amount, while those in the top 30% of earners will only see their payments reduced by 5%. The plan is also expected to particularly help Black, Hispanic, American Indian and Alaska Native borrowers, whose payments are expected to be reduced by 50% on average, as compared with 37% for white borrowers and 33% for Asian and Pacific Islander borrowers.

Tangent

In addition to the changes to the RPAYE program, the Biden Administration also announced separate proposed regulations Tuesday aimed at making colleges and universities more accountable at being a good financial value for students and not leaving them crippled with debt. That includes cutting off federal aid to career training programs “that leave students with unaffordable debts or poor job prospects,” such as those at for-profit private colleges. It would also identify programs with the the lowest financial value and warn students before they receive federal aid for one of those programs. It would also offer greater protections for taxpayers in the event that a college closes without warning.

Contra

NPR reports that budget issues at the Office of Federal Student Aid could hamper the agency’s ability to actually roll out these new changes, after Congress didn’t allocate any new funds to the agency in its omnibus government funding bill at the end of last year. Sources cited by NPR suggested it wouldn’t be possible for the agency to roll out the new regulations without “delaying or scaling back other things on its long list of obligations.” That could include a previously announced account adjustment for people on income-driven repayments that could see many borrowers’ debt wiped out, or cutting call center hours so borrowers trying to reach customer service will have longer waits.

What We Don’t Know

If the Biden Administration’s student loan forgiveness program will happen. The White House announced in August it would forgive $10,000 in federal student debt for borrowers earning less than $125,000, or $20,000 in forgiveness for Pell Grant recipients. While 26 million borrowers have already applied for debt relief, however, no funds have actually been disbursed, as courts put the program on hold in response to multiple lawsuits and blocked loans from being forgiven while the cases play out. Both lawsuits are now at the Supreme Court, which will hear oral arguments in February to determine if the debt forgiveness program should be allowed to take effect. A ruling on the program’s legality will come by the time the court’s term wraps up in June or early July at the latest.

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