The topic of student loan forgiveness dominated the news through 2022. Debate raged on about the ten-to-20 thousand dollar forgiveness. The Supreme Court will decide whether this debate lives or dies. Although this student debt reform provision is the most talked about, many Americans find that other components of the plan are more important to their financial situations. We will look at one that could have a significant impact on millions of borrowers. It is the income-driven repayment plan.
The Income Driven Repayment Plan is one of four Income Driven Payment Options. The borrower can select the option that best suits their needs. The new income-driven repayment plan provides enhancements to any current plan that may encourage borrowers to change.
The Income Driven Repayment Plan, as its name suggests, sets the debt payment of a borrower based on his or her personal income (if married filing jointly) or the family’s income. The current plan is built around the following key components:
- The payment level is set at a maximum of 10-15% adjusted gross income.
- Borrowers can shield up to 20K or 150% of their income.
- Interest is accruing even if the borrower makes their payments as requested. If the amount of the payment requested is not sufficient to cover the interest, the debt could increase even if the payments are made on time. This is known as negative amortization.
- After 20 years, the debt is forgiven. After 20 years of on-time payments, the debt is forgiven.
The following is the proposed revision of the plan:
- Payments still depend on the discretionary income calculation. The repayment level will now be limited to 5% of the adjusted income for graduate and undergraduate loans, respectively.
- The amount of income that is shielded will increase to 225% (or $30K) of the poverty level. It is important to note that a person earning $15 per hour or less won’t have to pay a fee.
- Interest subsidy: The government will provide a subsidy to cover interest when a borrower’s payments do not cover it. This will stop the negative amortization which occurs now in these cases.
- If you have paid for ten years and your initial balance was less than $12K, the remaining balance will be forgiven.
- After 20 years, debts are forgiven
There are some challenges with these proposed changes and they need to be addressed. These include:
- Who is eligible for the plan and who will be eligible? Will Parent Plus loans qualify?
- How will the borrowers who are currently enrolled in a plan version transition to the new one?
- The new plan will be implemented. This new plan will require a new administrative setup, including a new website. Or can it be integrated with the existing apparatus?
Finaly, the proposed changes allow for borrowers to pay less, or in some cases, none at all. They will also prevent negative amortization and forgive certain balances within a 10-year period. These seemingly insignificant changes may outweigh the benefits of a continuous $10K reduction from balances which can reach tens or even hundreds of thousands of dollars.
