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On Tuesday, the US Department of Education proposed new rules for federal student loan repayment that could take much of the pain and anxiety out of having student loans. The proposal would significantly change how Income Based Repayment works, resulting in lower student loan payments for millions of Americans. It would even mean that many lower-income Americans would have no monthly payments at all, and would make it easier for borrowers who keep up their payments to have the remaining balance of their loans forgiven.
Student loan debt is a major source of stress for millions of us. One out of 14 people with student debt in a 2021 survey said they had at some point had suicidal ideation related to their student loans — the ratio expanded to one in eight among borrowers who were unemployed — meaning that making repayment of student debt less painful could literally save lives. (As ever, if you’re having thoughts of suicide, please call the national suicide and crisis lifeline at 988.)
The new rules are expected to go into effect by July 1 this year, although some parts may be rolled out sooner. As The American Prospect’s David Dayen explains, the Education Department’s proposed rule will essentially put an end to student loans as we’ve known them up to now, as long as most people who qualify take advantage of the new income-based-repayment arrangement.
Dayen explainers:
The popular conception of a student loan, or any loan, is that you take out a sum of money from a lender—in this case, the Department of Education—with a promise to pay the principal back over a certain time frame, with interest. […]
Under income-driven repayment, all of the nuts and bolts of loans can be ignored. The borrower will pay a percentage of their income over a certain threshold for a set number of years, and then the obligation will be met. Notions of a “principal balance” or “interest” or anything else will be immaterial when the amount due is just based on what you earn.
Under the current income-based repayment plan (or plans; the New York Times notes there are currently five of them), people making over roughly $20,000 have their payments set at 10 percent of their discretionary income. Depending on the plan, the balance of the loan would be forgiven after 20 or 25 years. The new plan would reduce the number of available income-driven plans; most people would be able to take advantage of a revised version of the least expensive, called the REPAYE plan, in which payments are based on the borrower’s monthly income and family size.
Dayen outlines the proposed changes:
The new system, published in the Federal Register on Tuesday, would raise the income threshold for payments to $30,000 per year—so people making $15 an hour would not have to pay anything—and the cap would fall to 5 percent of discretionary income, half the previous rate. Plus, for those who originally took out $12,000 or less in student loans, the arrangement would terminate after ten years. That likely includes every borrower who attends community college. Every $1,000 above that would add a year, with a cap of 20 years for undergraduate loans and 25 years for graduate loans.
Also too, the cap on monthly payments for graduate school would be 10 percent of discretionary income, as it is now; people with combined undergrad and graduate debt would pay a percentage proportionate to how much of their debt is one or the other.
Here’s another hell of a good idea: Currently, if you have income-based repayment and your payments aren’t enough to pay the interest on the loan (pretty common with big grad school debts, just ask me), the unpaid amount of interest is capitalized back into your loan, so your balance still keeps rising every year. As the Times explains,
In the proposed plan, if a borrower’s payment isn’t high enough to cover the interest due that month, the remaining interest will not be charged or tacked onto the balance.
That will be a huge relief to borrowers who diligently make payments yet still see their balances balloon over the decades because they’re not paying enough to cover the interest owed.
In addition, the new proposal would tweak the definition of “discretionary income” — which currently uses a formula designed to exclude costs of food and rent for a given area — to exempt more income, which would result in lower payments, too. And instead of having to recertify your income-based repayment every year (oh yeah, I need to do that!), borrowers who opt in to allow sharing of their information from IRS can just let the Student Loan program recalculate it annually. For the first time ever, people whose loans are in default will be able to qualify for income-based repayment; the catch is that they’d have to enroll in a plan with higher monthly payments than REPAYE. Which seems dumb, but it’s something at least.
Dayen notes that the revisions to income-based repayment will create
a system where the lender would make its outlays back if the benefits of the college wage premium manifest. If the borrower has a successful career, they pay more; if it doesn’t work out, they would pay less, or even nothing. After 20 or 25 years, the relationship would end.
But gee, I feel so close to my student loan servicer. They stay in touch so closely that at holiday meals, I always include a table setting for Navient.
Now, as every discussion of the revised REPAYE plan points out, this fix only applies to borrowers, who will certainly benefit from less anxiety and more predictability when it comes payments. The much larger problem of constantly growing college costs still needs addressing.
Saaaay, I bet Elizabeth Warren and Bernie Sanders have some ideas about, say, having the federal government cover tuition and fees for all public colleges and universities. You could talk to them!
The new rules are also separate from Joe Biden’s earlier plan to forgive up to $20,000 in federal student debt, which is still awaiting arguments before the Supreme Court next month. In another development in that case, the Public Rights Project has filed an amicus brief on behalf of 40 local governments in 24 states, arguing that the multi-state lawsuit against debt forgiveness is balderdash and applesauce, because the states offer only “speculative and indirect financial harms,” while for most states and local governments, loan forgiveness would increase tax revenue, give citizens greater housing security, and other benefits. Sounds good to us, although it might have helped if the brief had cited some 16th Century alchemist to prove that debt forgiveness is related to longstanding American law and tradition.
[American Prospect / CNBC / NYT / Public Rights Project]
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