Student loan debt forgiveness spent a lot of time in the headlines through 2022, with the much debated ten to twenty thousand dollars of outright forgiveness dominating the discourse. This debate is now in the hands of the Supreme court and will live or die on their decision. Despite this provision of student debt reform dominating the headlines, there are other key components to the plan that many Americans will find more consequential to their financial situation. Today we will examine one with the potential to have significant ramifications for millions of borrowers, the income driven repayment plan.
You should know the Income driven repayment plan is a part of a suite of 4 existing Income driven payment options. Borrowers can choose between the 4 as to which is the best fit for their situation. The new income driven repayment plan offers enhancements that could spur borrowers in any of the current plans to make a change.
As the name would imply, the Income driven repayment plan sets a borrowers debt payment based on their personal or family income if married filing jointly. Some key components of the current plan constructions are as follows:
- Payment level is set to be a max of 10-15% of Adjusted Gross income.
- A Borrower is allowed to shield income up to 150% of the poverty level ($20K).
- Even if a borrower is making their called-for payments on time, interest is still accruing. If the called for payment is not enough to outpace the interest on the count, the borrowers debt could grow while making payments on time. This is called negative amortization.
- After 20 years of on-time payments. The debt is forgiven.
The proposed revision to the plan is as follows:
- Payments are still based on discretionary income computation. However, now, repayment levels will be capped at 5% and 10% of adjusted income for undergraduate and graduate loans respectively.
- The new income shielded amount will be increased to 225% of poverty level ($30K). This is significant as a person making $15 an hour or less will not have to make a payment.
- Interest subsidy - The government will provide an interest subsidy, so if a borrower's payments are not enough to cover the interest a subsidy will be provided. This will prevent the negative amortization that now occurs in these instances.
- For those who have made payments for 10 years, and their initial balance was below $12K, their remaining balances will be forgiven.
- After 20 years of payments debt is forgiven
These proposed changes are not without their own challenges and need to have some questions answered. Such as:
- Who will qualify for the plan? Will Parent Plus loans qualify?
- How will borrowers enrolled in the current version of plan be transition to the new?
- Rollout of the new plan. Will this new plan require an all new administrative setup including a website, or can it be integrated into the current apparatus?
Finally, the proposed changes will allow borrowers to make smaller payments, in some cases none at all, prevent negative amortization, and forgive some balances within 10 years. For many borrowers these seemingly small changes will out weight the benefit of having the continuous $10K reduced from balances that run in to the tens of thousands.