More student loan borrowers may have $0 payments under Biden’s new plan. What you need to know

Personal finance

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In the new student loan repayment plan proposal rolled out this month by the Biden administration, more borrowers could see their monthly payments drop to $0.

The new option revises one of the four existing income-driven repayment plans, which cap borrowers’ bills at a share of their discretionary income with the aim of making the debt more affordable to pay off.

Instead of charging borrowers 10% of their discretionary income a month, under the proposal, the Revised Pay As You Earn Repayment Plan, or REPAYE, people would be required to pay 5% of their discretionary income toward their undergraduate student loans.

The new REPAYE plan could officially be available July 1, 2024, according to higher education expert Mark Kantrowitz. That estimate accounts for a 30-day public comment period on the proposed regulation, and then a window before new rules can go into effect. But some parts of the plan could be implemented sooner, he said.

Here’s what borrowers need to know.

More people will have $0 payments

Under the current REPAYE plan, discretionary income is calculated as money earned over 150% of the federal poverty guideline. And so, single borrowers begin to make payments on income over roughly $21,900, based on 2023 guidelines, said Kantrowitz.

Under the new plan, borrowers wouldn’t need to make payments on income earned until it hit 225% of the federal poverty guideline, or about $32,800, Kantrowitz said.

He provided an example of how monthly bills could change with the overhauled option.

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Previously, a borrower who made $40,000 a year would have a monthly student loan payment of around $151. Under the revised plan, their payment would drop to $30.

Someone who earned $90,000 a year, meanwhile, could see their monthly payments shrink to $238 from $568, Kantrowitz calculated.

Those who earn under around $32,800 will have $0 monthly payments.

Undergraduate borrowers benefit most from the change

The new option should be available to borrowers with undergraduate and graduate student loans, although undergraduate borrowers will have lower payments.

Those with Parent Plus loans won’t be eligible to enroll in the overhauled plan.

Defaulted loans are typically ineligible for income-driven repayment plans.

Yet under the new proposal, those who have fallen behind may be able to sign up for the income-based repayment plan, another one of the income-driven repayment plan options.

Borrowers will need to enroll

Once the new REPAYE plan is available, borrowers can call their student loan servicer to enroll in the option, or apply at StudentAid.gov.

“Any new plan will likely take quite some time to implement, so borrowers will have plenty of time to learn about how it might work,” said Scott Buchanan, executive director of the Student Loan Servicing Alliance, a trade group for federal student loan servicers.

There’s a 10- or 20-year payment timeline

After 20 years of payments on undergraduate student loans, any leftover debt is forgiven on the current REPAYE plan. The revised option preserves that timeline.

Plus, under the Biden administration’s proposal, those with original student loan balances of $12,000 or less may get their loans forgiven after just 10 years.

Forgiven student debt may come with a tax bill

It’s unclear whether debt forgiven at the end of the repayment timelines will be taxable at the federal level.

Debt forgiveness used to trigger a tax bill under income-driven repayment plans. But a recent law ended that policy until at least 2025, and experts expect it to become permanent.

It’s also possible that some states will consider the forgiven debt taxable.

What’s going on with the payment plan pause?

The pandemic-era relief policy suspending federal student loan bills and the accrual of interest has been in effect since March 2020. 

For now, the Education Department is leaving things a little open-ended when it comes to the timing of payments resuming.

It has said the bills will be due again only 60 days after the litigation over its student loan forgiveness plan resolves and it’s able to start wiping out the debt.

If the Biden administration is still defending its policy in the courts by the end of June, or if it’s unable to move forward with forgiving student debt by then, the payments will pick up at the end of August, it has said.

The Supreme Court will start hearing arguments over the plan on Feb. 28.

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