On January 10, 2023, the U.S. Department of Education (DOE) proposed a revised pay as you earn repayment plan. This was prompted by the temporary pause on President Biden’s student loan forgiveness. The proposed plan is the Education Department’s latest attempt to make student loan repayments more affordable. If it comes through, it would reduce the monthly payments for millions of undergraduate borrowers.
Background Of Biden’s Loan Forgiveness & The Revised Pay As You Earn Repayment Plan
President Biden announced the historic student loan debt forgiveness plan on August 24, 2022. This plan promised to cancel up to $20,000 in federal student loans for eligible borrowers who had received a Pell Grant in college. Those who didn’t receive a Pell Grant would be eligible to get up to $10,000 canceled. Individuals earning less than $125,000 or households earning less than $250,000 were eligible for loan forgiveness with Biden’s plan.
Unfortunately, a couple of months after the debt forgiveness plan was announced, a federal judge in Texas declared it was unlawful and filed a lawsuit. Several other states did the same, effectively blocking the plan. At this time, Biden’s loan cancellation plan is still in limbo, awaiting a final court decision.
Following this setback, the Department of Education has been exploring other ways to make student loan repayments more manageable. The new revised pay as you earn repayment plan hopes to do just that.
What Is The New Student Loan Repayment Plan?
The new student loan repayment plan essentially overhauls an existing option to make it more borrower-friendly.
Currently, federal student loan borrowers can choose from four income-driven repayment plans. These include Income Based Repayment (IBR), Income Contingent Repayment (ICR), Pay As You Earn (PAYE), and Revised Pay As You Earn (REPAYE). All of these plans base the monthly repayments to the borrower’s income and other factors. However, each plan varies in terms of its eligibility requirements, payment formulas, and terms and conditions. These monthly payments are recalculated every year and may change or remain the same. Borrowers who enroll in any of these plans qualify to get the remaining balance forgiven after 20 or 25 years, depending on the plan.
Instead of creating a 5th plan to this list, the DOE took the decision to re-design the existing Revised Pay As You Earn (REPAYE) plan. Currently, the REPAYE calculates monthly repayments as 10% of borrowers’ discretionary income. Discretionary income is adjusted gross income above 150% of the federal poverty line for their family size. Borrowers who have only undergraduate loans and who are enrolled in the current REPAYE, may qualify for student loan forgiveness after 20 years. Borrowers who have graduate school loans qualify for student loan forgiveness after 25 years.
The newly proposed revised pay as you earn repayment plan (repaye) offers borrowers friendlier terms.
What The New Revised Pay As You Earn Repayment Plan Could Mean For You
There’s no doubt that this is one of the most generous of all income-driven repayment programs. Here’s what it would mean for you if the proposed plan is passed.
1. More of your income will be protected from payments
The new repayment plan increases the amount of income protected from repayment from 150% to 225% of federal poverty guidelines. Under the new plan, single borrowers will not be required to make monthly loan payments if their annual income is less than $30,500. That means if you’re earning $15 or less per hour, you won’t need to make any monthly student loan repayments.
Borrowers whose household income for a family of 4 is less than $62,400 would also not have to make payments under the plan.
2. Your monthly loan payments could be reduced by 50% for undergrad debt
Another major change that the new plan proposes is reducing the discretionary income that’s counted towards payments. In its current form. Payments are reduced to 10% of the borrower’s discretionary income on most IDR plans.
The new revised pay as you earn repayment plan proposes lowering this amount to 5%. That means borrowers who are now paying 10% of their discretionary income would pay only 5% of their monthly income. This could reduce a borrower’s payments significantly freeing up more cash for other essential expenses. Only borrowers with undergraduate federal student loans qualify for this new plan.
3. Unpaid interest will not accumulate
The new revised pay as you earn repayment plan (repaye) proposes stopping the accumulation of unpaid interest for borrowers who are making regular, on-time payments. Unpaid interest generally accumulates when payments that the borrower can afford are less than their accrued interest. Stopping this accumulation would also stop borrowers’ balances from growing.
If the proposed plan is passed, monthly loan payments will be applied to interest first. If the payment is not enough to pay off the total interest due, no charges would apply to the remaining interest. Only borrowers who make regular, timely payments will qualify for this benefit.
4. You’ll be protected from default and forbearance
Putting payments on hold through default or forbearance minimizes the risk of defaulting on your loans. However, you still pay a price. The new plan aims to protect borrowers from these consequences. According to the new plan, borrowers who are 75 days behind on their payments would be automatically enrolled into another income-driven repayment plan with the lowest payments that they are eligible for.
5. Borrowers with undergrad loans may get their debt forgiven earlier
The appeal of income-driven repayment plans is they offer borrowers a path to loan forgiveness after a specific period of time. Currently, borrowers may get their remaining balance forgiven after 20 or 25 years of regular payments.
The new plan proposes forgiving outstanding debt after 10 years of regular payments for undergraduate borrowers. This would only apply to undergrad loans with an original balance of $12,000 or less. The idea behind this proposal is that taking 20 to 25 years to pay back a relatively small amount of $12,000 seems unnecessarily long.
This update will help almost all community college borrowers to clear their debt completely within 10 years.
6. Loan Composition Will Determine The Student Loan Forgiveness Timeline
The proposed new REPAYE plan includes multiple student loan forgiveness timelines for borrowers with undergrad student loans. How long a borrower takes to qualify for forgiveness depends on the type of federal student loan the borrower has and the initial loan balance.
Borrowers with undergrad loans qualify for student forgiveness after 10 years if their starting balance was $12,000 or less.
Undergrad loan borrowers with a starting balance between $12,000 and $20,000, may qualify for loan forgiveness at any time between 10 and 20 years. The exact amount would depend on the balance.
Borrowers with a starting balance of $20,000 or more in undergrad loans can get any remaining balance forgiven after 20 years.
Borrowers who work in careers that qualify for Public Service Loan Forgiveness (PSLF) will continue to qualify for loan forgiveness after 10 years.
Who Is Excluded From The New Revised Pay As You Earn Repayment Plan
Borrowers with graduate loans do not get all the benefits of the proposed plan.
Those who have only graduate federal student loans will continue paying 10% of their discretionary income. However, the increased poverty limit exclusion could result in a modest reduction in their overall monthly payments.
Parent PLUS borrowers are not eligible for any of the benefits of the newly proposed revised pay as you earn repayment plan.
There’s still a long way to go before these proposed changes are implemented. Official regulations are expected to be finalized later in the year and implemented before the end of 2023.
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