(NerdWallet) – Federal student loan borrowers may soon see their monthly payments cut by at least half — and potentially have their debt forgiven in as little as a decade — due to big changes the Education Department intends to make to one of its existing repayment plans.
More details on the revised income-driven repayment plan surfaced in mid-January, and the Biden administration aims to finalize changes to the new IDR plan, known as REPAYE, by the end of 2023. It’s the latest effort by President Biden to ease the weight of the nation’s collective $1.76 trillion in student loan debt by removing more roadblocks to debt forgiveness.
“There are a lot of steps between here and having [the plan] actually in place, but the potential is there for a really big impact,” says Scott Stark, a certified financial planner at Financial Finesse, a workplace financial wellness company.
That impact will be felt more by some borrowers than others. Generally, those who earn the least relative to how much they owe stand to benefit the most. IDR plans cap monthly payments at a certain percentage of a borrower’s income and forgive any remaining balance after payments have been made for a set number of years.
Here are five key beneficiaries of the fresh IDR plan, according to experts.
1. Borrowers who attended some college but didn’t graduate
People who took out student loans and attended some college — but didn’t finish and earn a bachelor’s degree — can land in a tough spot. Though they tend to have lower loan balances, they also don’t enjoy the 66% average income bump that college graduates have compared to high school graduates with some college, per 2017 data from the Economic Policy Institute, a progressive think tank.
The revised IDR plan could help: Borrowers who originally took out $12,000 or less in student debt would have their remaining balance forgiven after 10 years of qualifying monthly payments, down from 20 to 25 years under existing plans.
People who didn’t get a bachelor’s degree account for 51% of households with student debt under $10,000, according to an Urban Institute analysis of 2019 government data. Even $0 monthly payments under the revised IDR plan would count toward the 10-year forgiveness finish line.
“The administration is really looking out for people that tried college and it didn’t work out for them,” says Mike Pierce, executive director and co-founder of the Student Borrower Protection Center.
2. Borrowers in areas with a high cost of living
IDR plans cap monthly student loan payments at a certain percentage of a borrower’s discretionary income — currently, it’s your household income minus 150% of the federal poverty guideline for your family size and location. If your household income is $75,000 for a family of four in Virginia, your non-discretionary income is $45,000 and your discretionary income is $30,000. Payments under current IDR plans are a percentage of that $30,000.
The revised plan subtract 225% of the federal poverty guideline from your income, sheltering more of your earnings. That same $75,000 household would see payments based on just $7,500 of discretionary income. On top of that, undergraduate loan payments would be capped at 5% of discretionary income, instead of at least 10% under current plans, shrinking monthly payments for the example household from $250 to about $31.
This is a meaningful change for borrowers who live in expensive areas where housing, food and other costs cut further into discretionary income, explains Betsy Mayotte, president and founder of The Institute of Student Loan Advisors.
3. Borrowers at risk of delinquent or defaulted student loans
It may seem counterintuitive, but borrowers who have fairly small balances show “extraordinary” rates of default and delinquency, explains Dominique Baker, an associate professor of education policy at Southern Methodist University. There’s overlap here with borrowers who didn’t finish college: The default rate among borrowers who didn’t complete their degree is triple the rate for borrowers who earned a diploma, Education Department data shows.
Borrowers in default will be allowed to enroll in the revised IDR plan, giving them access to more affordable monthly payments and eventual loan forgiveness. Currently, student loan borrowers in default are blocked from any IDR plan.
Another perk: Borrowers who are at least 75 days late on their payments would also be automatically enrolled in the revised IDR plan. This could help struggling borrowers avoid student loan default in the first place — if they lose their job or earn less than about $32,800 per year as a single tax filer, or less than $67,500 for a family of four, they’ll qualify for $0 monthly payments under the revised plan.
4. Borrowers who can’t pay off all their interest each month
Ballooning student loan balances could be a thing of the past.
Under the revised plan, any interest unpaid each month would be covered by the government, so long as the borrower keeps up with their monthly payments. The leftover interest would not accrue.
“The effects on individuals of not seeing their balances go up every month will be extremely beneficial in ways that we’re only starting to understand,” explains Daniel Collier, an assistant professor of higher and adult education at the University of Memphis who researches IDR plans. “It will probably have the greatest psychological impact toward the good on borrowers with high debt loads.”
5. Borrowers of color
On average, Black, Hispanic, American Indian and Alaska Native borrowers would see their lifetime payments per dollar borrowed be 50% of what they would be on the current REPAYE plan, the Department of Education estimates, while white borrowers’ projected lifetime payments per dollar borrowed would be 37% less than they would be on the current REPAYE plan.
Racial income gaps are behind these estimates. Compared to the median income of white households, Hispanic households earn 75%, American Indian and Alaska Native households earn 64%, and Black households earn 61%, according to data from the 2015-2019 U.S. Census.
“Black borrowers borrow the most, they are more likely to borrow and are more likely to struggle with repayment, so things that improve and make student debt more manageable are likely to help the people that are harmed most,” says Victoria Jackson, assistant director of higher education policy at The Education Trust, a nonprofit organization that promotes racial and economic equity in higher education.
Who won’t benefit from the new IDR?
Parents who borrowed to help their kids attend college
Parents who took out federal loans — known as Parent PLUS loans — to help their kid pay for college would be excluded from the revised IDR plan. Currently, these borrowers are only eligible for the least-generous of the four existing IDR options, which is called income-contingent repayment.
“That’s particularly a concern for Black households,” says Tisa Silver Canady, who holds a doctorate in education and is founder of the Maryland Center for Collegiate Financial Wellness. In 2018, 42% percent of Black Parent PLUS borrowers were low-income, compared to 8% of white Parent PLUS borrowers, per The Century Foundation, a left-leaning think tank that studies equity in education, health care and work.
Borrowers with graduate school debt
Borrowers who took out federal loans for graduate school would still see payments shrink, but the boost would be less favorable under the IDR revision than for those with only undergraduate loans.
People with only graduate school loans would still pay 10% of their discretionary income per month, which is the current IDR rate, compared to 5% for those with undergraduate loans. Borrowers with both graduate and undergraduate debt would pay somewhere between 5% and 10%.
How can I sign up?
The revamped IDR plan is not yet available. The Education Department aims to launch it by the end of 2023 — but facing a budget crunch and a long to-do list, that timeline is uncertain.
Federal student loan payments could resume before the revised plan rolls out. Contact your student loan servicer to discuss payment options that are available in the meantime.
Borrowers who are currently enrolled in REPAYE will be automatically transitioned to the revised plan when it’s available. Most other borrowers will need to contact their servicer to sign up.