The Biden administration has quietly named a new repayment plan for student loan borrowers that would be based on their income. But the key details still need to be worked out.

Student Loan Income-Based Payment Plans – How They Work Now

Income-based repayment (IDR) plans, a broad term that describes a collection of similar plans that base a student loan borrower’s monthly payment on income and family size, can be a crucial option for borrowers. And sometimes these plans are the only way a borrower can have a manageable monthly student loan payment. IDR plans include Income Contingent Reimbursement (ICR), Income Based Reimbursement (IBR), Pay As You Earn (PAYE) and Revised Pay As You Earn (REPAYE).

IDR plans are based on a formula applied to the borrower’s income (usually their Adjusted Gross Income, or AGI, on their federal income tax return) and family size to calculate their monthly payment. Payments are based on what is known as the borrower’s “discretionary income,” which, for the purposes of these plans, is defined as the amount of the borrower’s AGI above 100-150% of the federal poverty exemption, depending on the specific plan, adjusted for the size of the family. Monthly payments are typically 10% to 20% of the borrower’s monthly discretionary income (20% for ICR, 15% for IBR, and 10% for PAYE and REPAYE).

Payments under IDR plans last 12 months and must be renewed annually based on the borrower’s updated income documentation, usually their most recent federal income tax return. Changes in a borrower’s income would likely lead to changes in their monthly IDR payment for the next 12 months. After 20 or 25 years (depending on the plan), any remaining balance would be forgiven, although this could be considered taxable “income” to the borrower. Congress included a provision in the American Rescue Plan that exempts student loan forgiveness from federal taxes until 2025, but this provision would have been extended or made permanent to benefit the majority of borrowers who have a loan plan. payment based on income.

Biden’s New Income-Based Payment Plan for Federal Student Loans

This week, the Department of Education sleepless a new IDR plan, tentatively called the “Expanded Income Contingent Reimbursement Plan” (EICR), in a negotiated rulemaking session. Negotiated rulemaking is the process by which the Department can renew existing regulations to reform key federal student loan programs. The Department is reviewing a wide range of federal student loan programs through the negotiated rulemaking process, and part of the focus this week has been creating a new income-based repayment plan under federal rules.

Aside from the name, however, there are few details about EICR, because the negotiated rulemaking committee, made up of key stakeholders, including student loan borrowers, financial aid administrators, colleges and universities, people with disabilities, legal services organizations, Service Members and Lenders – You need to come to a consensus on what the program will look like, and that will take time. However, the Department is considering several key elements of EICR:

  • Eligible student loans. Currently, all existing income-based plans have different loan eligibility criteria. Some plans (ICR, PAYE, and REPAYE) are limited to direct loans only. The PAYE plan has restrictions based on the loan disbursement date. Parent PLUS loans are excluded from most income-based plans. The Department has not yet determined which loans will be eligible for EICR.
  • Treatment of married borrowers. The IBR, PAYE, and ICR plans allow married borrowers to exclude spouse income when filing taxes as married filing separately. REPAYE, however, takes into account the combined income of married borrowers regardless of their marital status for tax reporting purposes. Legislators must determine how EICR will treat married borrowers.
  • Payment amounts. Existing income-based plans use different formulas to determine a borrower’s monthly payment. These formulas apply a poverty exemption to exclude an initial amount of income, then base the payment on a percentage of the borrower’s AGI on that exclusion. Legislators must consider how large the poverty exclusion will be for the EICR and what percentage of a borrower’s remaining income should be counted. Interestingly, the Department is considering a “fringe” approach to EICR repayment, where wealthier borrowers pay a higher percentage of their income than lower income borrowers. None of the existing IDR plans adopt this payment calculation method.
  • Interest benefits. During periods when income-based monthly payments are lower than the amount of monthly interest earned, a borrower’s overall balance can grow significantly due to negative amortization. The Department proposes an interest subsidy for EICR that would reduce the accrual of interest during times when the calculated EICR payments are $ 0, but lawmakers would need to determine the extent of that subsidy.
  • Repayment term. Existing IDR plans have a payment term of 20 or 25 years, depending on the plan. The Department of Education appears to be considering a 20-year EICR period for college students, but a 25-year period for borrowers who obtain a loan for a graduate program. This is similar to how the REPAYE plan works. The Department is considering counting certain deferrals and forbearances towards the repayment term.

Whats Next?

Developing negotiated rules is a long and complicated process that requires a series of public hearings. Committee members must reach consensus to finalize changes to the federal student loan programs. It will likely take a year or more to finalize any regulatory reform.

Lawmakers and advocates for student loan borrowers have urged the Biden administration to simplify and streamline the complicated IDR system by creating a new single IDR plan that is open to all federal student loan borrowers and all types of federal loans, has a higher poverty exemption than existing IDR plans and limits payments to 10% of a borrower’s discretionary income for no more than 20 years. It remains to be seen whether the EICR would achieve those goals.

Negotiated standard-setting hearings are open to the public. The next session will be from December 6 to 10. Individuals may participate in any of these hearings and may request the opportunity to comment; to participate, you can register here.

Other readings

Changes to Student Loan Forgiveness: Who Qualifies and How to Apply Under Biden’s Expanded Forgiveness

Student Loan Forgiveness: Did you get a “good news” email from the Department of Education? More are on the way.

Biden’s $ 11.5 billion in student loan forgiveness – some automatic, some not. Here’s a breakdown.

The Winners and Losers of Biden’s Student Loan Forgiveness Initiatives


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