Biden administration plans to ease rules for income-based student-loan forgiveness
4 min read . Updated: 10 Jan 2023, 05:54 PM IST 
PremiumProposed plan would allow low earners to pay less and wipe out college debt more quickly
The Biden administration on Tuesday released a detailed plan that will make it easier for student-loan holders to wipe out their debts using income-driven repayment plans.
The proposed rule from the Education Department is a key step in overhauling the $1.6 trillion federal loan program that has left millions with ballooning debts. The administration first announced the change in August when it unveiled its plan to cancel up to $20,000 in student debt for qualifying borrowers. The Supreme Court plans next month to take up a challenge to that broader debt-forgiveness, which is frozen after being blocked by lower courts.
Income-driven repayment plans were designed to help lower earners borrow for college, but few have been able to use them effectively because of technical problems and onerous amounts of income-verification paperwork. If enacted, the proposed changes would provide qualifying borrowers with significantly more-generous options that could leave them debt-free sooner, while paying off only a fraction of their total loan balances.
To prevent student-debt balances from ballooning in the future, the administration plans to halve, to 5% from 10%, the amount of discretionary income borrowers must pay each month on their undergraduate loans if they are enrolled in an income-driven repayment plan. Borrowers with incomes below 225% of the federal poverty line wouldn’t have to make monthly payments on their loans. The administration estimated that that level corresponds to an individual income of less than roughly $30,600 annually or any borrower in a family of four who makes less than about $62,400 a year.
Borrower loan balances won’t grow as long as they make their monthly payments, even if a low-income borrower’s monthly requirement is set at $0. The change would also forgive loan balances for people enrolled in income-based plans after 10 years of payments, down from 20 under many of the current options, for borrowers whose original loan balances were $12,000 or less.
“We are, for the first time, creating a student-loan safety net in this country," said Education Department Undersecretary James Kvaal.
The proposed rulenow must go through a 30-day public-comment period, after which the department can release a final rule.
Borrowers and members of both parties in Congress have criticized the existing income-driven repayment program as broken. A government watchdog report last year found that only 157 borrowers out of eight million enrolled in the program successfully had their debt forgiven after decades of payments. The program has existed since 1992.
In its regulatory notice, the administration acknowledged that the plan would lead to “increased costs of the student loan programs to the taxpayers in the form of transfers to borrowers who would pay less on their loans." Some opponents of debt relief, including congressional Republicans, have criticized that arrangement as unfair to taxpayers who didn’t take out loans or who paid them off in full.
Payment-plan changes could, over time, be nearly as costly as the mass debt-cancellation plan is projected to be. A University of Pennsylvania Wharton School model suggested a range of possible price tags for the changes to income-driven repayment ranging from around $70 billion over 10 years to $450 billion over a longer period, depending on enrollment, and whether colleges continue to raise costs.
The shortened repayment period for borrowers with less than $12,000 in debt could make some degree-granting programs, especially at community colleges, effectively free, according to some analysts. A Biden plan to provide free community college was nixed in spending talks with congressional Democrats.
“Based on how much typical community-college students pay for college and earn after graduation, it would allow a great many of them to be payment-free for 10 years, or close to it," wrote Kevin Carey, a higher-education expert at the nonpartisan New America Foundation, in a December analysis of the income-driven repayment plan based on the details the administration released last year.
According to a fact sheet released Tuesday, the Department estimates that 85% of community-college borrowers would be debt free within 10 years of entering repayment.
To cut down on the paperwork that discourages many borrowers from signing up or remaining enrolled in payment programs, the administration aims to automate much of the process, in part by working with the Internal Revenue Service to verify borrower incomes each year.
Many borrowers already enrolled in income-driven repayment plans will be closer to debt forgiveness under changes announced by the administration last year. Borrowers who went into forbearance—a temporary payment freeze where interest continues to build up—for at least 36 months between July 2009 and March 2020 will receive at least three years of payment credit when payments resume later this year.
The Education Department said it would fix a longstanding problem where loan payments made to different servicers weren’t counted together, which can lead to undercounting of payments that qualify for eventual forgiveness. Those changes are likely to affect around 3.6 million borrowers, or nearly 10% of all holders of federal student loans.
Payments and interest accrual on federal student loans have been frozen since the start of the pandemic in March 2020. They are now scheduled to resume 60 days after litigation over the loan-forgiveness program is resolved or the program is implemented.