How the new income-driven repayment plan for federal student loans would work

Proposal cuts payments in half, covers unpaid monthly interest, and more


Your federal student loan servicer is going to start expecting payments from you in January.

The federal government’s student loan repayment pause that was issued during the pandemic is set to expire at the end of December. Americans with student loan debt are expected to resume making payments in January.

President Joe Biden announced on Wednesday a new income-driven repayment plan for borrowers, and explained how it changes the current system.

According to the White House, the new plan will allow low- and middle-income borrowers to have smaller and more manageable monthly payments. It will cap the amount borrowers pay each month based on a percentage of their discretionary income, which is the money a person has left over after paying their taxes and other necessary cost-of-living expenses.

Many of the plans also cancel a borrower’s remaining debt once they make 20 years of monthly payments.

“But the existing versions of these plans are too complex and too limited. As a result, millions of borrowers who might benefit from them do not sign up, and the millions who do sign up are still often left with unmanageable monthly payments,” the White House said in a release.

Read: Did you receive a Pell grant? Here’s how to check

It has not been made clear if this plan requires further approval processes or when it will go into effect. The Department of Education is proposing a rule that would do the following:

Monthly payments cut in half

The program would cap monthly payments for undergraduate loans to 5% of a borrower’s discretionary income -- that’s half the rate that borrowers must pay now under most existing plans (10%).

Borrowers with both undergraduate and graduate loans will pay a weighted average rate, according to CNBC. The White House expects the average annual student loan payment to be lowered by more than $1,000 for both current and future borrowers.

Raise amount considered non-discretionary income

The plan would raise the amount of income that is considered non-discretionary income and protect it from repayment. That means no borrower earning under 225% of the federal poverty level, about the annual equivalent of a $15 minimum wage for a single borrower, will have to make a monthly payment, officials said.

An example the White House gave was that a typical single public school teacher with an undergraduate degree who makes $44,000 a year would only pay $56 a month on their loans -- that’s compared to the $197 they pay now under most income-driven repayment plans.

What is discretionary income? It’s the extra income you have after paying for basic necessities like taxes, everyday expenses and household bills. The federal government calculates this using your state’s federal poverty guidelines and then decides how much you’ll have to pay each month.

Covering unpaid monthly interest

The plan would also cover a borrower’s unpaid monthly interest as long as they make a monthly payment.

That is to ensure that a borrower’s loan balance will not grow as long as they make the required monthly payments. The White House said it will even cover the interest for those with a monthly payment of $0.

Forgiving some loan balances in 10 years of payments

If your original loan balance was $12,000 or less, your balance will be forgiven after 10 years of payments instead of the original 20 years.

The Department of Education estimates that this reform will allow nearly all community college borrowers to be debt-free within 10 years.

Examples of how this new payment plan would work

The White House provided the following examples of how this loan repayment plan would help low- and middle-income borrowers:

  • A typical single construction worker (making $38,000 a year) with a construction management credential would pay only $31 a month, compared to the $147 they pay now under the most recent income-driven repayment plan, for annual savings of nearly $1,400.
  • A typical single public school teacher with an undergraduate degree (making $44,000 a year) would pay only $56 a month on their loans, compared to the $197 they pay now under the most recent income-driven repayment plan, for annual savings of nearly $1,700.
  • A typical nurse (making $77,000 a year) who is married with two kids would pay only $61 a month on their undergraduate loans, compared to the $295 they pay now under the most recent income-driven repayment plan, for annual savings of more than $2,800.

The White House said in each of these scenarios, the balances would not grow as long as the borrowers make their monthly payments, and their remaining debt would be forgiven after borrowers make the required number of qualifying payments.

Starting in the summer of 2023, borrowers will be able to allow the Department of Education to automatically pull their income each year to avoid the need to recertify their income annually.

Loan repayment data sheet. (The White House)

Read: Deep dive: What’s next for US student debt crisis

About the Author:

Kayla is a Web Producer for ClickOnDetroit. Before she joined the team in 2018 she worked at WILX in Lansing as a digital producer.