Biden has a contingency plan for waiving student debt.  Here’s how it works.

Biden has a contingency plan for waiving student debt. Here’s how it works.

Biden has a contingency plan for waiving student debt.  Here’s how it works.

The Biden administration is moving forward a different approach to tackling the student debt crisis while its main initiative, a plan to forgive up to $20,000 in student loans per borrower, remains is legally suspended.

Even if the debt relief effort is rejected by the courts, the Department of Education’s Plan B could help millions of borrowers by reviewing income-based repayment plans. It also addresses some of the worst pitfalls of student debt, such as “negative amortization” or when a person’s loan balance continues to grow despite making payments consistently.

The plan to reform income-based repayment plans, or IDRs, was first announced in August but was overshadowed by the Biden administration’s plan to forgive up to $20,000 of debt per borrower. But as the debt relief program has been stalled by legal challenges – and now headed to the Conservative Supreme Court – the Department of Education said it is moving forward with the second part of its plan, which will review the IDR to help lower and middle-income borrowers.

The IDR overhaul “is extremely important,” Persis Yu, deputy executive director of the Student Borrower Protection Center (SBPC), an advocacy group for people with student debt, told CBS MoneyWatch. “We see a lot of borrowers saying, ‘I don’t get it – I took $15,000 and now I owe $40,000,’ which is emotionally demoralizing and financially devastating.”

She said that IDR “had been operating in a really toxic way before.”

Here’s what you need to know.

What are the income-driven repayment plans?

Income-based repayment plans are designed to make student loan management easier by tying a person’s monthly payment to their income. According to Pew Research, about a third of all borrowers are enrolled in IDRs.

But critics have pointed out that IDRs have some serious pitfalls. First, there are four such plans, each with its own rules and criteria that can give borrowers a headache. Worse, the plans have been criticized for allowing student debt to grow through negative amortization, with one report from the SBPC noting that some borrowers were seeing double or triple their student loan obligations even though they were on a repayment plan.

Negative amortization is when the repayment is not enough to cover the interest on the loan, which means the unpaid interest is added to the principal of the loan, which can then grow despite the borrower’s repayments.

What would happen to the IDR under Biden’s plan?

Biden administration officials said on Tuesday they would mostly roll back three IDR plans and focus on one program it intends to simplify and make more generous. The plan to remain is called Revised Pay As You Earn, or REPAYE, a scheme that was first introduced in 2016.

Can this plan be challenged in court?

As the Biden administration is proposing a review of existing IDR plans and has followed procedures to do so, Yu said she does not believe that is likely.

“Someone could [still] come in and say, “You didn’t follow the rules,” but that’s a different kind of challenge,” Yu noted.

A student debt relief plan to forgive up to $20,000 in loans faces two legal challenges: one brought by Republican-led coalition of six states and the other brought two Texas borrowers with overdue student loans. In the first case, the states argue that the plan will hurt revenue earned from servicing federal loans. The second lawsuit argued that the plan constituted an “abuse of executive power.”

What will change in REPAYE?

The Biden administration wants to revise the REPAYE plan through a series of proposed regulations that will be published in the Federal Register on January 11.

Under the proposed rule changes, REPAYE will increase the amount of income that is protected against debt repayment. Currently, enrollees must make payments of 10% of their discretionary income, which is set at an earnings level above 150% of the Federal Poverty Guidelines. This means that only $20,400 of income per borrower is considered non-discretionary and therefore protected against IDR plans.

The proposal would increase the amount of non-discretionary income for single borrowers to about $31,000, or 225% of the federal poverty line. This means that a greater proportion of the borrower’s income would be protected against debt repayments by providing more money for necessities such as rent or food.

Borrowers in a family of four would see their income protected below $62,400 under the new guidelines, the Department of Education said.

The proposal will also halve the percentage of discretionary income that borrowers must repay, with the share dropping to 5% from the current 10%.

What would happen to unpaid interest?

The proposal would eliminate the issue of negative amortization or charging unpaid interest on a borrower’s balance.

About 7 in 10 borrowers on IDR plans saw their balances increase after entering the plans, the Education Department said Tuesday.

“Under the proposed plan, the borrower’s monthly payment would still be applied to interest first, but if there is not enough to cover that amount, any remaining interest will not be charged,” the Department for Education said in a statement.

Would this affect loan forgiveness?

The proposal also makes some changes to loan forgiveness, reducing the time that people with student debt can get relief.

Current plans promise to cancel any remaining debt after 20 or 25 years of payments. The new rules would erase all remaining debts after 10 years for those who took out loans of $12,000 or less. For every $1,000 more you borrow, a year will be added.

This change would most likely help college graduates, the Department of Education said. It is estimated that 85% of community college borrowers would be debt free within 10 years of joining the IDR program.

Are any loans or borrowers excluded from this plan?

People who have taken out Parent PLUS loans – usually the parents of students – are excluded from the revised plan.

Yu of the Center for Student Borrower Protection said this foreclosure is damaging to many families as parents often rely on these loans to finance their children’s education.

Parent PLUS loans “are so easy to get and so important for low-income families to ensure their children have access to college,” noted Yu. “Foreclosure of Parent PLUS borrowers leads more families into poverty.”

How much does all this save borrowers?

The Department of Education reported that typical four-year university graduates would save about $2,000 a year compared to today’s plans.

It added that, on average, lower-income borrowers would experience the greatest relief, with lifetime payments per borrowed dollar falling by an average of 83% for borrowers in the bottom 30% of earnings. By comparison, those in the top 30% earners would see their payments drop by 5%.

What is the expected cost to taxpayers?

Overhauling the IDR plans could cost as much as $190 billion, according to the Committee on Responsible Federal Budgeting, a public policy group that is pushing to lower the national debt.

In a Tuesday statement, the group called the proposal “expensive and flawed.” Among his criticisms, aside from the price of the program, is that it could ultimately drive up tuition costs and encourage more Americans to take out loans to finance their college education.

The public can comment on the Biden administration’s proposal on the Regulations.gov website for 30 days.

When would the changes come into effect?

The Department for Education said it expects the rules to be finalized later in 2023 and believes it could start implementing some of the rules later this year.

—With Associated Press reports.

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