October 1, 2020

Biden’s Income-Based Student Loan Plan Would Dramatically Lower Payments For Some — Here’s How – Forbes

Biden’s Income-Based Student Loan Plan Would Dramatically Lower Payments For Some — Here’s How - Forbes

Former Vice President Joe Biden is offering a new income-driven repayment plan for student loan borrowers that could significantly lower their monthly payments. With much of the current student loan policy discussions revolving around student loan forgiveness, Biden’s income-based student loan repayment plan proposal has been flying under the radar.

Under current law, federal student loan borrowers could be eligible for multiple income-driven repayment plans. These types of plans — sometimes referred to as “IDR” plans for short — allow borrowers to repay 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 function on a basic level in a similar way:

  • An initial amount of income — typically 100% to 150% of the federal poverty limit (depending on the specific plan) based on the borrower’s family size — is excluded. So borrowers with incomes within those limits would have payments of $0.
  • Borrowers with incomes above those poverty limits would pay a percentage of their “discretionary income” — which is the amount of their Adjusted Gross Income (AGI) above the poverty exclusions.

The currently-available plans do not factor in expenses. Payments under these plans last for 12 months at a time, and are then recalculated every year. After 20 or 25 years (depending on the plan), any remaining balance is forgiven, although this could be treated as taxable “income” to the borrower in the year in which it gets forgiven.

Here’s how much a single student loan borrower with a family size of 2 making $40,000 per year in AGI would pay under each of the currently-available income-driven repayment plans:

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  • Income-Contingent Repayment (ICR) — 20% of discretionary income: Monthly payment of $395 per month.
  • Income Based Repayment (IBR) — 15% of discretionary income: Monthly payment of $195 per month.
  • Pay As You Earn (PAYE) and Revised Pay As You Earn (REPAYE) — 10% of discretionary income: Monthly payment of $130 per month.

Under Biden’s plan, however, the numbers would be dramatically different. According to Biden’s campaign, “individuals making $25,000 or less per year will not owe any payments” on qualifying federal student loans, and also won’t accrue any interest on those loans — a stark difference compared to the existing plans, where interest still accrues. “Everyone else will pay 5% of their discretionary income over $25,000 toward 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 currently-available income-driven repayment plans, would pay only $62.50 per month — a substantial reduction.

But that’s not all. According to Biden’s campaign, his income-based repayment plan — unlike the currently-available plans — would also factor in expenses, like housing, food, and utilities. This could lower the monthly payments even further, and in some cases, possibly zero out the payments entirely.

After 20 years of payments, any remaining balance would be forgiven. This is similar to the current income-driven repayment plans, although ICR and IBR have 25 year terms instead of 20.

So what’s the catch? Biden’s plan would only apply to undergraduate federal student loan debt. It is unclear what options would be available to borrowers with graduate school debt, but presumably they could still access existing income-driven repayment plans.

Biden also appears to be also advocating for the elimination of taxation on loan forgiveness for all income-driven plans. This would provide a particular benefit to graduate students, who could be hit with substantial tax bills at the end of their repayment term under current law, which treats debt forgiveness under income-driven plans as taxable in many cases.

Biden has also called for widespread student loan forgiveness. Under his plan, his administration would forgive all undergraduate federal student loan debt for borrowers with annual incomes under $125,000 who attended public colleges and universities, as well as historically black colleges and universities (HBCUs) and private minority-serving institutions (MSIs). Biden also supports $10,000 in across-the-board student loan forgiveness 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 allow student loan debt to be more easily discharged in bankruptcy. 

Further Reading

Would Biden Enact Broad Student Loan Forgiveness? These Advocates Say Yes

How “Cancel Student Debt” Went From A Fringe Idea To Mainstream

Elizabeth Warren And Chuck Schumer: The Next President Must Cancel Student Debt Without Congress

Dept. Of Education Tells Court It Has Denied 94% Of Loan Forgiveness Applications

Senate Stimulus Bill: No Second Stimulus Checks, And 5 Other Takeaways