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The New Income-Driven Repayment Plan: How It Works

The Education Department unveiled its proposed updated income-based repayment plan.

Now out for public comment, the proposed rules outline the most generous undergraduate student loan repayment plan to date.

  • Borrowers earning less than $30,600 per person or $62,400 per family of four would have no monthly payments.

  • Most other borrowers would see a payment reduction of at least fifty percent.

  • Students who borrow less than $12,000 would see their remaining balances wiped away after 10 years of payments, instead of 20 to 25 years.

While Biden's Forgiveness Plan would provide existing borrowers with a one-time boost, this revised IDR could assist current and future college students for years to come.

According to the Education Department, future borrowers' lifetime payments per dollar borrowed would decrease by an average of 40% compared to the current IDR options. This average payment reduction is even greater for borrowers of color: "Black, Hispanic, American Indian, and Alaska Native borrowers would see a halving of their lifetime payments per dollar borrowed," the department wrote.

The timing for rollout is still unclear.

How the new IDR plan is different

Payment options are more convenient.

The proposal decreases the options available to borrowers. The government currently offers five distinct IDR plans due to the fact that older versions were not retired when new versions were introduced. This IDR plan is an update to the commonly used Revised Pay As You Earn plan, also known as REPAYE. Additionally, the department will phase out or limit enrollment in three additional repayment plans.

More earnings are protected

Currently, the Department of Education calculates IDR payments based on discretionary income — household income minus 150 percent of the federal poverty guideline for family size and location.

In Virginia, a family of four with a household income of $75,000 has non-discretionary income of $41,625 and discretionary income of $33,375. Current IDR payment plans are based on a percentage of this $33,375.

The new plan sets the discretionary income threshold at 225 percent of the federal poverty line. This same $75,000 household would receive payments based on a discretionary income of $12,572.50.

Required payment is halved.

Current IDR plans require monthly payments of at least 10% of discretionary income. Under the new proposal, the income-based repayment rate for undergraduate loans would be 5% of discretionary income.

This means that in addition to the reduced repayment amount resulting from the change in discretionary income calculations, borrowers with undergraduate loans will pay a substantial amount less.

That's the difference between a $278 monthly payment and a $52 payment for a family with a household income of $75,000.

Those with only graduate school loans would continue to pay 10%. Borrowers with both undergraduate and graduate loans would pay between 5% and 10% on average.

"A borrower with $20,000 in undergraduate education loans and $60,000 in graduate education loans would pay 8.75% of their income," according to the Education Department. A borrower with $30,000 in loans from each lender would pay 7.5% interest.

Forgiveness arrives faster.

Under current IDR plans, borrowers are eligible for forgiveness of their remaining student loan balance after 20 or 25 years, regardless of how much they borrowed. However, the new plan would reduce this to 10 years for borrowers with loan balances of less than $12,000.

The Education Department projects that 85 percent of all community college borrowers will be debt-free within ten years under the new plan.

Interest accrued but unpaid is canceled.

Currently, REPAYE payments do not cover all of a loan's monthly interest. The government pays fifty percent of the unpaid interest, with the remainder accruing over time.

Under the revised plan, the government would cover any unpaid monthly interest as long as the borrower maintains timely monthly payments. This interest would not accumulate.

While it may be unclear when the new program will begin, it is never too early to begin planning your next steps.

Call Edapt USA today at +1 800-438-2869 to find out if you should pursue a different repayment plan in 2023.

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