Biden Student Debt Relief: New Income-Based Repayment Plan for Students

For many student loan borrowers, making monthly payments can seem impossible — especially if you have a lower income.

The good news is that the federal government offers income-driven repayment plans for federal student loans. When you enroll in one of these plans, you pay a percentage of your discretionary income rather than the full payment amount.

After a set period, usually 20 or 25 years, you can qualify for student loan forgiveness if you still have a balance. But student loan debt can still weigh on some borrowers. As a result, the Biden administration has proposed adding another income-based repayment plan for student loans.

Let’s take a look at what we know so far about President Biden’s suggestion for student loan repayment on a lower income.

Details of the new income-based repayment plan for student loans

The proposed income-driven repayment (IDR) plan might help those concerned about making their student loan payments. Here is what the White House has suggested for this payment plan for eligible borrowers:

• Reduce payments to 5% of discretionary income.
• Increase the amount of income that qualifies you for income-driven repayment.
• Forgive loan balances of $12,000 or less after 10 years.
• Cover the borrower’s unpaid interest each month as long as payments are made (even if the payment amount is $0).

This plan is part of a package of student loan changes, including to Public Service Loan Forgiveness (PSLF) and how qualifying payments are determined.

Discretionary income is calculated using family size and adjusted gross income. Additionally, those with older Federal Family Education Loan Program loans might need to consolidate their student debt to participate. It’s important to note that private student loans aren’t eligible for federal income-driven repayment or the student loan forgiveness plan.

How the new income-driven repayment plan compares to the current income-based repayment options

What we don’t know about Biden’s new IDR plan

Even though we have an outline of what to expect from the new plan, the U.S. Department of Education has yet to provide all the details. Some of the issues that aren’t clear are:

• How repayment will work for graduate loans.
• Whether Parent PLUS Loans will be included.
• Other eligibility requirements that might be imposed.
• Debt forgiveness for those who have more than $12,000 at the end of 10 years.

We will need to wait until more information comes to light before fully understanding this student loan repayment plan.

When to apply for the Biden administration’s new IDR plan

While the Biden-Harris administration has submitted its proposal to help borrowers, the actual process of implementing the plan can take months. The Department of Education has to formulate its own rules and then post them for public review.

There are additional procedures that must be followed before moving forward as well. It’s possible that the new plan won’t be in effect until sometime in mid-to-late 2023.

The current state of student debt relief

In the meantime, the current moratorium on monthly student loan payments and monthly interest is due to end on Dec. 31, 2022. Unless the pause is extended again, borrowers will have to start making payments. However, if you’re eligible for one of the existing IDR plans, it can make sense to contact your loan servicer. These plans are designed for low-income borrowers.

While you wait to see if you qualify, check into whether you qualify for updated requirements for PSLF or if you might have some of your years of payments counted toward other cancellation requirements.

Don’t forget that the Biden administration recently announced up to $20,000 in student loan forgiveness for most borrowers. That application is open. Be sure to fill it out so you don’t miss out on debt forgiveness you might be eligible for.

Finally, some of the help for borrowers is designed to reduce the tax bill for student loan forgiveness. Generally, loan cancellation is treated as income on your tax return. The exception is PSLF. That loan forgiveness has been excluded from taxable income since its inception. However, all federal student loan forgiveness won’t count on your taxes through 2025.

What about private student loans?

For now, only federal loans qualify for income-driven repayment. If you have private student loans, you can’t access these benefits. However, you might be able to refinance your private loans through Juno to a lower interest rate and save money that way. A lower interest rate might also help you pay off your remaining balance faster.

If you have both private and federal student loans, consider keeping them separate. You can refinance your private loans while consolidating your federal loans. Consolidating your federal loans might help you take advantage of current and future income-driven plans and maintain eligibility to have a portion of your loan amount canceled in the future.

Bottom line

A lot is going on right now with federal student loans. Forgiveness, new income-driven plans and other measures to help borrowers are in the works. However, there is some discussion about how future borrowers might be treated and how the higher education system works.

For now, it’s a good idea to stay on top of the situation, especially if you have debt. You can check the status of your federal loans by going to the National Student Loan Database and seeing what loan servicer you have. If you have questions, you can contact your servicer to find out how you might be able to benefit from the latest policy changes.