Biden’s income-based student loan plan would dramatically cut payments for some – here’s how
Former Vice President Joe Biden is proposing a new income-based repayment plan for student loan borrowers that could significantly reduce their monthly payments. With much of the current student loan policy discussions revolving around student loan cancellation, Biden’s income-based student loan repayment plan proposal has gone under the radar.
Under current law, federal student loan borrowers could be eligible for multiple income-based repayment plans. These types of plans – sometimes called “IDR” plans for short – allow borrowers to pay off their federal student loans using a formula that is applied to their income. While each plan is unique (with its own formula, eligibility criteria, and restrictions), the plans all work at a basic level in the same way:
- An initial amount of income – typically 100% to 150% of the federal poverty line (depending on the specific plan) depending on the size of the borrower’s family – is excluded. Thus, borrowers with incomes within these limits would have payments of $ 0.
- Borrowers with incomes above these poverty limits would pay a percentage of their “discretionary income” – which is the amount of their adjusted gross income (AGI) above the poverty exclusions.
Currently available plans do not take expenses into account. Payments under these plans last 12 months at a time, and are then recalculated annually. After 20 or 25 years (depending on the scheme), any remaining balance is written off, although it may be treated as taxable “income” to the borrower in the year it is canceled.
Here’s how much a single student loan borrower with a family of 2 earning $ 40,000 per year in AGI would pay under each of the income-based repayment plans currently available:
- Income Based Refund (ICR) – 20% Discretionary Income: Monthly payment of $ 395 per month.
- Income Based Refund (IBR) – 15% Discretionary Income: Monthly payment of $ 195 per month.
- Pay As You Earn (PAYE) and Revised Pay As You Earn (REPAYE) – 10% Discretionary Income: Monthly payment of $ 130 per month.
Under Biden’s plan, however, the numbers would be radically different. According to Biden’s campaign, “people earning $ 25,000 or less per year will not owe any payments” on eligible federal student loans, and will not earn interest on those loans – a stark difference from existing plans, where interest is still running. . “Everyone else will pay 5% of their discretionary income over $ 25,000 for their loans. “
The result is a dramatic reduction in monthly student loan payments. The same borrower above, who would have a payment of between $ 130 per month and $ 395 per month under the income-based repayment plans currently available, would pay just $ 62.50 per month – a substantial reduction.
But that’s not all. According to Biden’s campaign, his income-based repayment plan – unlike currently available plans – would also take into account expenses, such as shelter, food and utilities. This could reduce monthly payments even further and in some cases eliminate payments altogether.
After 20 years of payments, any remaining balance would be forfeited. This is similar to current income-based repayment plans, although the ICR and IBR have terms of 25 years instead of 20.
So what’s the catch? Biden’s plan would only apply to federal undergraduate student debt. It is not known what options would be available to borrowers with graduate debt, but they could presumably still access existing income-focused repayment plans.
Biden also appears to be advocating for the elimination of the loan cancellation tax for all income-driven plans. This would offer a particular benefit to graduate students, who could face large tax bills at the end of their repayment period under the current law, which considers debt forgiveness under income-oriented schemes. as taxable in many cases.
Biden also called for a widespread forgiveness of student loans. As part of his plan, his administration would write off all federal undergraduate student loan debts for borrowers with annual incomes below $ 125,000 who attended public colleges and universities, as well as historically black colleges and universities (HBCU ) and private institutions serving minorities (MSI). Biden also supports $ 10,000 blanket student loan cancellation for all borrowers as an economic stimulus in response to the recession, and he has expressed support for Senator Warren’s proposal to amend the bankruptcy code to make it easier for student loan debts to be discharged in the event of bankruptcy.