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Your monthly student loan payments could be drastically reduced under a new plan: Here’s what we know



In addition to announcing widespread student loan forgiveness, the Biden administration says it is working to reform the way borrowers will repay their loans going forward.

As part of this, the Biden administration is proposing a rule that would create a new income-driven repayment plan intended to “substantially reduce future monthly payments for lower- and middle-income borrowers.”

There are four income-driven repayment plans: Pay as You Earn, Revised Pay as You Earn, Income-Based, and Income-Contingent. All four have monthly payments set at a level “intended to be affordable based on your income and family size,” according to the U.S. Department of Education.

For each plan, your payment is based on a different percentage of your discretionary income (the difference between your annual income and a certain percentage of the poverty guidelines based on your family size and where you live).

The newly proposed income-driven repayment (IDR) plan would drastically differ from the aforementioned plans.

According to data from the White House, borrowers would be required to pay no more than 5% of their discretionary income on undergraduate loans, down from the 10% rates available on the current IDR plans.

The amount of income considered non-discretionary income would also rise, meaning no borrowers earning under 225% of the federal poverty level ($30,577.50 for a single borrower) would owe a monthly payment.

Borrowers below that threshold could see payments as low as $0.

If, for example, you are making $44,000 a year, a current IDR plan could require you to make monthly payments of $197. Under the new plan, that would drop to $56 a month, saving you almost $1,700.

If you were making slightly less — let’s say $35,000 — your monthly payment would drop from the roughly $122 you’d pay under a current plan to $19. With an income of $77,000 a year, your payment drops from $294 to $61.

Here’s how you can calculate what your payment would be under the proposed plan:

  • Determine your federal poverty guideline based on state and family size using this chart.
  • Multiple that by 2.25. (This is the 225% rate mentioned above.)
  • Subtract that number from your income.
  • Multiple that by 0.05. (This is the 5% of your discretionary income mentioned above.)
  • Divide that number by 12 for your monthly payment.

According to the White House, “no borrower’s loan balance will grow as long as they make their monthly payments—even when that monthly payment is $0 because their income is low.” This is not currently the case with other IDR plans.

Additionally, after 10 years of payments, borrowers with an initial loan balance of $12,000 or less will have their remaining debt forgiven.

Like other aspects of President Joe Biden’s Wednesday announcement, further details about this plan haven’t yet been released. We do know that monthly payments could change, primarily because of a change in your income or household size, and that there could be certain requirements you would have to meet to qualify for this plan.

The Education Department says the proposed regulation will be published soon on the Federal Register and the public will be invited to common on the draft rule for 30 days.

In addition to proposing a new income-driven repayment plan, the Biden administration announced widespread federal student loan forgiveness and proposed long-term changes to the Public Service Loan Forgiveness program.



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