Further relief for student borrowers could be achieved through new rules

The Biden administration’s plan to pay off trillions of dollars in student loan debt is in legal limbo, at least temporarily blocked by lawsuits. But a related proposal to lower monthly payments for millions of borrowers takes a big step forward this week.

The U.S. Department of Education on Tuesday introduced a proposed rule to simplify and expand eligibility for its earnings-related repayment programs, which tie monthly payments on federal student loans to the borrower’s ability to pay. New borrowers would benefit most from the changes; The administration estimated that total payments from future borrowers would be cut by an average of 40%. For Black, Latino, Native American and Alaskan Native borrowers, the administration said the changes would halve their total payments.

The administration predicted that the proposed changes would disproportionately benefit lower-income borrowers. Lifetime payments per dollar borrowed would fall an average of 83% for borrowers in the bottom 30% of incomes, while the top 30% of earners would save just 5%, the administration said.

Critics of the proposal, which carries an estimated price tag of $138 billion over 10 years, say it’s the wrong solution. Maya Macguineas, president of the deficit-focused committee on federal budget stewardship, said this would encourage more borrowing and higher tuition costs, while “helping highly educated households that will be — or already are — near the top of the income spectrum.”

Meanwhile, some of those who welcomed the additional relief criticized the proposal to exclude loans taken out by parents and graduate students. “It ignores the reality that low-income families — especially low-income families of color — are more likely to need ParentPLUS loans or a college degree to earn the same salary as their more affluent white peers,” Persis Yu said. Deputy General Manager of the Student Borrower Protection Center.

The Department of Education expects to publish the proposed rule on Wednesday and then make public comments before finalizing the rule later this year. It’s also working on a separate set of rules to help students identify the colleges and certification programs that leave students buried in huge debts without the professional skills needed to dig themselves out.

What changes are proposed for loan repayment?

As part of the proposal, the Department of Education would make the modified revised pay-as-you-earn plan the main income-based plan and phase out the income-based repayment and pay-as-you-earn programs for new borrowers. The point, the department says, is to eliminate some of the complexity that’s keeping people from signing up.

Income-linked repayment plans help borrowers by limiting their monthly payments to 10% to 20% of their discretionary income, which is defined as income above 150% of the federal poverty line. For a single person, discretionary earnings start at about $20,400, the department said.

All unpaid balances will be deleted after the number of payments required for each plan. For example, in the REPAYE plan, borrowers who borrowed as students are eligible for loan forgiveness after 20 years of payment or 25 years for graduate loans. Under the earnings-related repayment plan, payments are provided for all borrowers for 25 years.

The proposed rule would also make REPAYE significantly more generous to undergraduate borrowers. A borrower’s total payments could be reduced in three ways:

  • Reducing monthly payments to 5% of a borrower’s discretionary income.
  • Reducing the amount of income classified as discretionary, further reducing payments. Instead of income above 150% of the poverty line, disposable income would start at 225% of the poverty line.
  • Earlier lending for students who borrowed less. Under the proposal, students who borrowed no more than $12,000 would be eligible for forgiveness after making the equivalent of 10 years of payments. For each additional $1,000 borrowed, the time-to-forgiveness is increased by one year’s worth of payments.

According to the department, increasing income levels, which are considered non-discretionary, will result in more borrowers paying $0 per month under the REPAYE plan. This includes individuals earning less than about $30,600 per year and borrowers in a family of four earning less than about $62,400.

In addition, the ministry wants to prevent interest from accumulating on borrowers who meet their repayment schedules. Under the current program, the amount owed by borrowers who keep their payments current will increase if those payments are not large enough to cover interest costs. Up to 70% of borrowers in income-controlled repayment programs have seen their balances increase because of this problem, the department said.

Finally, the proposal calls for borrowers who are at least 2½ months in arrears on their payments to be automatically placed on an income-tested repayment schedule with the lowest monthly payment. Defaulting borrowers would also have access to an income-based plan.

Who would be helped?

The proposed changes would only apply to undergraduate student loans enrolled in REPAYE, not graduate student loans. According to the ministry, borrowers with either type of loan would pay between 5% and 10% of their discretionary income, depending on how much they borrowed for each tier.

Parents who had taken out PLUS loans for their children would also be excluded. Parents today are eligible for the ICR plan if they consolidate their borrowing into a federal direct loan, but they are not eligible for the REPAYE program.

Additionally, REPAYE only applies to federal student loans. Borrowers who have taken out loans from Perkins and the Federal Family Education Loan program may enroll in REPAYE when consolidating their loans into a direct consolidated federal loan, but only if they do not include PLUS loans to parents in the package.

Where is the one-time credit waiver?

The US Supreme Court is scheduled for February 2nd. September to consider the administration’s appeal against two court rulings that put on hold debt relief proposed in August. It is questionable whether the ministry had the legal authority to write off so many debts in one fell swoop.

The administration argues that the HEROES Act of 2003 empowers the department to dramatically change repayment rules in federal emergencies like the COVID-19 pandemic. Their opponents, led by Republican state officials, argue that the department misreads a law passed to aid National Guard members and military reservists called up after the September 11 terrorist attacks.

The judges agreed to try the case on an accelerated schedule, so a decision could potentially come well before the Supreme Court’s annual accounts at the end of June.

What else is suggested?

The department also plans to find a way to identify the colleges and training programs with the “lowest monetary value.” This would take the form of a list of institutions that offer the lowest level of education for the money – places that charge high prices but don’t leave students with a matching skill level.

At this point, however, it’s still figuring out how to do that. The department plans to release an information call on Wednesday, asking the public to suggest ways to determine which programs create the least value.

The list would ultimately be used to warn students before they enroll and borrow through the programs that could inundate them with debt. It’s part of the department’s effort to increase accountability among institutions whose tuition is paid for by federal student loans.

Other parts of that effort include the passage of a new “gainful employment rule,” which requires training programs to successfully place students in jobs to be eligible for state aid, and strengthening protections against taxpayers getting stuck with the bill for unpaid student loans , when colleges fail or are shut down.

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