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 2. Personal Finance


BIDEN ADMINISTRATION UNVEILS SWEEPING CHANGES TO STUDENT LOAN REPAYMENT

Last Updated: Jan. 10, 2023 at 6:33 a.m. ET First Published: Jan. 10, 2023 at
6:32 a.m. ET
By

JILLIAN BERMAN

  comments


THE PROPOSAL WOULD MAKE INCOME-DRIVEN REPAYMENT MORE GENEROUS

PRESIDENT JOE BIDEN ANSWERS QUESTIONS WITH EDUCATION SECRETARY MIGUEL CARDONA IN
WASHINGTON IN OCTOBER 2022. THE BIDEN ADMINISTRATION ON TUESDAY ANNOUNCED
CHANGES TO INCOME-DRIVEN STUDENT-LOAN REPAYMENT.

Associated Press
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The future of the Biden administration’s student debt-relief plan currently
rests with the Supreme Court, but in the meantime, officials are moving forward
with sweeping reform that could have an even bigger impact on many borrowers and
the student-loan system overall. 

Department of Education officials provided details on their proposal to change
income-driven repayment, the suite of plans borrowers can use to pay back their
debt as a percentage of their income. Under the new rules, borrowers would have
more of their income protected before being required to make payments, borrowers
with only undergraduate loans will have the share of their discretionary income
they’re required to pay toward their loans each month cut in half, and any
interest not covered by borrowers’ monthly payments under the new plan won’t be
charged, among other changes. 

The proposal, which agency officials said they’re planning to implement this
year, comes after years of complaints from borrowers and advocates who have said
that income-driven repayment, which was intended to protect borrowers from poor
student-loan outcomes during periods of bad economic luck, is often difficult to
access. Even when borrowers do manage to enroll, they’ve said their payments are
too expensive. 


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It also comes as the Biden administration’s more headline-grabbing proposal — to
cancel $10,000 in student debt for a wide swath of borrowers and $20,000 for
those who received a Pell grant — is slated to be heard by the Supreme Court. 

After listing other Biden administration student-loan initiatives, including
proposing and defending the debt relief plan, Secretary of Education Miguel
Cardona said he was “most proud of today’s announcement,” referring to the
income-driven repayment proposal. 

“Today, we’re making a new promise to today’s borrowers and to generations to
come: Your student-loan payments will be affordable,” Cardona told reporters.


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INCOME-DRIVEN REPAYMENT HAS BEEN AVAILABLE SINCE THE EARLY 1990S

The government has offered borrowers the ability to repay their student loans as
a percentage of their income since the early 1990s. The plans were originally
designed as a sort of insurance policy to protect borrowers from the worst
student-loan outcomes when — either because of their individual circumstances, a
broader economic downturn, or both — they couldn’t afford to make payments on
their debt through a standard mortgage-style plan. After 20 or 25 years of
payments under these plans, the government discharges the remaining balance. 

Over the years, and in particular under the Obama administration, the government
has made more borrowers eligible for these plans and made them more generous,
but income-driven repayment hasn’t protected borrowers in the ways officials had
hoped. For one, advocates say, borrowers have struggled to access income-driven
repayment both due to confusion surrounding the option and because student-loan
servicers have thrown obstacles in the way of borrowers actually signing up for
the plans. 

Even once borrowers were on the plans, they’d struggle to make payments,
borrowers and advocates have said, and watched their balances balloon because
payments tied to income only touched a small part of the interest. 

In the lead-up to the pandemic, each year 1 million borrowers experienced the
outcome income-driven repayment was designed to protect against — default. And
even those who weren’t in default struggled to make progress paying down their
debt. A quarter of borrowers between the ages of 18 and 35 who had student debt
in 2009 had a larger student-loan balance in 2019, and 10% of these borrowers
saw their balances grow by nearly four times in those 10 years. 



‘A TRUE STUDENT-LOAN SAFETY NET’

The Biden administration’s plan aims to address these concerns in a few key
ways. “We are, for the first time, creating a true student-loan safety net in
this country,” Undersecretary of Education James Kvaal told reporters. 


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• Under the new plan, more income is protected before borrowers are required to
make payments. Previously, individuals earning more than $20,400, or a family of
four with a household income of at least $41,600, would have to make payments on
their loans. The Biden administration is proposing to increase that threshold to
$30,500 for an individual and $62,400 for a family of four. The new numbers
correspond roughly to the salary of someone earning a $15 minimum wage. 

• Borrowers with loans from their undergraduate schooling will devote less of
their income to their student-loan payments than before. Right now, the minimum
a borrower can put toward their debt each month under income-driven repayment is
10% of their discretionary income. Under the Biden administration plan,
borrowers with only undergraduate loans can pay 5% of their discretionary
income. Borrowers with both undergraduate and graduate loans will pay between 5%
and 10% of their discretionary income based on a weighted average of their
loans. For borrowers who originally borrowed $12,000 or less, they’ll be able to
have the balance of their debt canceled after 10 years of payments. Right now,
borrowers not in public service have to make at least 20 years of payments
before their debt is written off. 

• The Biden administration’s plan will also put limits on how much a borrower
ends up paying in interest. Right now, it’s not uncommon for borrowers using
income-driven repayment to see their student-loan balance balloon — even when
they’re making payments — because their monthly payment isn’t enough to cover
the interest. Under the proposed changes, any interest not covered by a
borrower’s monthly payment won’t be charged. “In other words, you won’t go
deeper into debt because the interest is more than you can afford,” Kvaal said. 


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Still, in some ways the proposal doesn’t go as far as advocates had hoped.
Borrowers with Parent PLUS loans — the federal government’s program that parents
can use to pay for their childrens’ college — aren’t included in the plan.
Though the amount of money parents have borrowed through this program has
increased in recent years and many parents struggle to repay the debt, their
options for managing it are much more limited than non-parent borrowers. 

In addition, officials could face obstacles to implementing the plan. Congress
didn’t increase funding for the Office of Federal Student Aid, which manages the
student-loan program. A reform of this magnitude will likely require resources
to pull off successfully. 

A senior administration official told reporters that officials are “very
disappointed” with the level of funding FSA received from Congress. “That’s
going to make it a challenge for us to carry out a number of our policy
initiatives,” the official said. “We’re currently working through the full
impact of the funding level that we received from Congress. Our goal is to
implement this IDR plan in 2023.” 

In the past, when officials expanded income-driven repayment, take-up was
disappointing as borrowers didn’t always know about the plans, struggled to
understand the myriad options and faced obstacles from servicers accessing the
plans. Officials told reporters that they planned to mitigate some of those
issues by automatically enrolling borrowers who are at least 75 days behind on
their payments into the new income-driven repayment plan. In addition, they hope
that by sunsetting other versions of income-driven repayment — going forward,
new borrowers won’t be able to enroll in old plans — borrowers won’t face
decision fatigue because the best choice for repaying their loans will be
clear. 

CRITICS HAVE WORRIED A GENEROUS PLAN COULD SUBSIDIZE POOR-PERFORMING SCHOOLS

The proposal is likely to face questions from critics. When President Joe Biden
announced the first outlines of the changes to income-driven repayment in
August, some worried that it would subsidize bad actors because borrowers with
the lowest earnings — perhaps because they graduated from, or left,
poor-performing programs — receive some of the biggest benefits. 

Biden administration officials also announced Tuesday that they’re beginning a
process of increasing accountability on poor-performing schools, including by
eventually publishing a list of programs that don’t provide value to students. 

“It’s time to name names about these programs and have a frank conversation
about the root causes of student debt,” Kvaal said. 

Critics have also worried that making income-driven repayment more attractive
could encourage students to borrow more and cost taxpayers. A senior
administration official on the call disputed that notion. 

“Almost every time there is a change in student loans to make the terms more
generous for students, people talk about moral hazards and potential abuse of
the program and there’s just no evidence that those predictions have ever come
to pass,” the official said. 


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ABOUT THE AUTHOR

Jillian Berman


Jillian Berman is the deputy enterprise editor at MarketWatch, where she covers
student loans and consumer debt. You can follow her on Twitter @JillianBerman.



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