Some new perks, but defenders are disappointed
The Department of Education has released important new details on its proposal for a new federal student loan repayment plan that would be based on the borrower’s income. While some low-income borrowers might see some benefits under the new scheme, other student loan borrowers might be left out altogether, disappointing borrower advocates. Here is the last one.
How Income-Based Student Loan Repayment Programs Work Now
Income Based Repayment (IDR) is a broad term that includes several federal student loan repayment plans. These plans tie a borrower’s monthly payments to their income and family size. Current IDR plans include Conditional Income-Based Reimbursement (ICR), Income-Based Reimbursement (IBR), Pay As You Earn (PAYE), and Revised Pay As You Earn ( REPAYED).
In theory, IDR plans provide an affordable repayment option for borrowers, even those with very large loan balances. The ICR, IBR, PAYE, and REPAYE plans all have a formula that is applied to a borrower’s income (usually their adjusted gross income, or AGI, as listed on their federal income tax return) and their family size. But much of the similarities end there, and the four IDR plans are a patchwork of confusing options that can be difficult for borrowers to navigate.
Each IDR plan bases payments on the borrower’s âdiscretionary incomeâ – which is a borrower’s AGI amount above an initial poverty exclusion, ranging from 100% to 150% of the cut-off. federal poverty for the size of the borrower’s family. The monthly payments are then tied to a percentage of discretionary income, which is different for each IDR plan. The formulas provide for a payment based on 20% of discretionary income for the ICR plan, 15% for IBR and 10% for PAYE and REPAYE.
Payments under IDR plans are recalculated every 12 months, and any balance remaining at the end of the repayment term – which is 20 or 25 years, depending on the plan – is written off. However, this type of loan forgiveness could be considered taxable âincomeâ for the borrower.
New repayment plan for income-based federal student loans in the works
Last month, the Biden administration announced that it was working on creating a fifth IDR plan. Biden had promised to back a new, more income-focused repayment plan during his 2020 presidential campaign.
The education ministry calls the new plan the âExpanded Income Based Reimbursementâ (EICR). The EICR plan was unveiled during a negotiated rule-making session, which is a formal process by which the administration can review existing federal student loan programs.
The Ministry has released few initial details on the EICR plan. But this week, the administration released a more detailed draft proposal:
- Poverty Exclusion. Current IDR plans exclude an initial amount of income from consideration before the repayment formula kicks in, effectively allowing low-income borrowers to pay little or nothing on their loans for 12 months at a time. ICR excludes initial income in the amount of 100% of the federal poverty line for a borrower’s family size, while IBR, PAYE and REPAYMENT exclude 150%. The ministry is proposing a more generous income exclusion for the EICR plan – 200% of the federal poverty line, or about $ 25,000.
- Refund formula. For borrowers whose incomes exceed the initial income exclusions, current IDR plans use different formulas to determine their monthly payment. The current formulas are 20% of discretionary income for the ICR plan, 15% for IBR and 10% for PAYE and REPAYE. The Ministry proposes a âmarginalâ approach to the EICR, whereby high-income borrowers pay a higher percentage of their income than low-income borrowers. The ministry proposes that borrowers earning between 200% and 300% of the federal poverty line would pay 5% of their discretionary income, then 10% of any discretionary income for income above 300%. None of the existing IDR plans adopt this complicated payment calculation method.
- Married borrowers. The IBR, PAYE, and ICR plans allow married borrowers to exclude spousal income by filing taxes separately. The REPAYMENT plan, however, takes into account the combined income of married borrowers, regardless of their tax status. The ministry proposes that the EICR scheme treat married borrowers the same way REPAYE does – co-employees, regardless of their tax reporting status.
- Interest benefits. During times when monthly income-related payments are less than the amount of monthly interest accrued, a borrower’s overall balance can increase dramatically due to negative amortization. The Department is proposing an interest subsidy for the EICR that would completely eliminate accrued interest during periods of $ 0 payments under the EICR. The proposal is silent on situations where a borrower’s monthly payment is greater than $ 0 but less than the amount of monthly interest accrued – a situation that can lead to an extreme increase in the balance over long periods of time.
- Repayment period. Existing IDR plans have a repayment term of 20 or 25 years, depending on the plan (25 years for IBR and ICR, 20 years for PAYE and 20 or 25 years for REPAYE depending on whether the borrower has graduate loans or not. .). The Ministry is proposing a 20-year repayment term for the EICR, similar to the PAYE plan.
These student loan borrowers would be excluded from the new income-based repayment plan
The Ministry made it clear in the comments accompanying its proposed EICR regulations that it wished to limit the EICR to undergraduate loans only. The ministry “proposes to make the EICR only available for undergraduate loans,” officials wrote in comments accompanied by regulatory language limiting the EICR to “direct subsidized loans to undergraduates, loans direct unsubsidized to undergraduate students and direct consolidation loans that only repay loans. received for undergraduate studies. This means that not all graduate student loans would be EICR eligible, and direct federal consolidation loans that combine undergraduate and graduate student loans would also be ineligible.
The ministry’s proposal would also exclude federal Parent PLUS borrowers. Parent PLUS loans are loans made to the parent of a student (the parent, not the student, is the borrower). Parent PLUS loans have historically been excluded from IDR plans, although consolidated Parent PLUS loans have the potential to be repaid under ICR, by far the most expensive of the IDR options. The Ministry’s proposed EICR plan appears to have no benefit for Parent PLUS borrowers, leaving those borrowers stuck with the ICR as their only option.
Advocates are disappointed with the ministry’s initial proposal
Details of the new EICR plan are, for now, only a proposal from the Ministry of Education, which was released as part of the development of negotiated rules. Developing negotiated rules is a long and complicated process that involves a series of public hearings by a rule-making committee. The committee is made up of various stakeholders and representatives, including borrowers, lawyers, lenders, schools and government officials. Policymakers must reach consensus to finalize changes to federal student loan programs and the rules that would govern new programs.
Borrower advocates on the negotiated rule-making committee this week expressed strong reservations about the proposed EICR plan. Borrower advocates and legal service representatives criticized the Ministry for excluding graduate school borrowers and Parent PLUS borrowers, and for failing to render the poverty exclusion, repayment plan formula and provisions simpler and more generous forgiveness. Defenders have also criticized the treatment of accrued interest by the regime. The committee could not reach a consensus on the details of the program, which means that the rule-making process will continue.
Student loan borrower advocacy groups have urged the Biden administration to simplify and streamline the complicated IDR system by creating a single IDR plan that is open to all federal student loan borrowers and all kinds of federal loans, he said. greater poverty exemption than existing IDR plans, and caps payments at no more than 10% of a borrower’s discretionary income for up to 20 years.
The EICR, as currently proposed, would achieve some of these goals, but not all, and advocacy groups have criticized the ministry’s proposals. The Student Borrower Protection Center (SBPC) said in a tweet that the EICR’s proposal “tries to solve some problems, but does not respond” to what is needed. The SBPC criticized the EICR’s marginal repayment approach and the disparate treatment of undergraduate and graduate borrowers. “[The Department] must provide all borrowers with the affordable student loan protections they deserve – using IDR to give people a way out of debt. ”
The finalization of the new EICR plan could take several more months.
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