On January 11, the Department of Education (ED) proposed new regulatory changes to the income-driven repayment (IDR) plans for federal student loans, specifically the Revised Pay As You Earn Repayment Plan or REPAYE. These changes would significantly reduce repayment under IDR and enable borrowers to have their loans completely forgiven after a period of successful payments. If implemented, IDR would effectively lower or eliminate the amount of federal student loan repayment that borrowers would be required to make, turning it into a type of blanket loan forgiveness.
Revised Pay As You Earn Repayment (REPAYE) bases the monthly student loan payment on 10% of discretionary income, as opposed to the amount you owe. The repayment term is 20 years for undergraduate loans, but increases to 25 years if you have any graduate school loans. (Photo via Getty)
Regardless of the borrower’s total outstanding federal student loan debt, IDR plans now limit monthly payments on outstanding federal student loan balances to a specific proportion of discretionary income, typically 10%. IDR plans come in four different varieties from ED. Depending on the exact loan type and IDR, borrowers who complete 20–25 years of timely payments are eligible for debt forgiveness on any outstanding balance.
The REPAYE plan’s proposed modifications would reduce monthly payment obligations for outstanding sums by at least half and, in some situations, shorten the time between payments and automatic forgiveness. According to a Penn Wharton Budget Analysis, the Biden Administration’s one-time universal loan forgiveness program would cost $469 billion over ten years and be coupled with the new REPAYE plan, into which the majority of IDR would be absorbed.
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How does Revised Pay As You Earn (REPAYE) work? (Photo via Shutterstock)
Expanding forgiveness through IDR accomplishes little to reduce the price of college, just like the administration’s past general loan plans. By distributing loans and only requiring partial repayment from borrowers, taxpayers who did not take the loans are simply burdened with the escalating expenses of college tuition and student loans. This strategy also creates a moral hazard by encouraging prospective students to take out big loans in the hope of having them partially or completely forgiven. Furthermore, because colleges anticipate bailing out their students in the future, the proposed reforms lessen their incentives to control expenses.
If approved, the proposed modifications to IDR would be included permanently in the federal student loan program since they would be adopted through the negotiated rulemaking process.
The Department of Education or ED currently manages four different IDR plan types:
REPAYE, the updated Pay As You Earn Repayment Plan;
Pay As You Earn (PAYE) Repayment Plan
IBR, or an Income-Based Repayment Plan;
Income-Based Repayment Program (ICR).
In accordance with the recently proposed regulation amendments, ED will phase down PAYE and ICR while restricting the circumstances under which borrowers may enter IBR, necessitating enrollment in REPAYE for the majority of borrowers who enter IDR. The more detailed adjustments center on reducing payback and hence increasing forgiveness under the REPAYE plan:
- Reduce the existing mandatory monthly repayment percentage for student loans from 10% of discretionary income to 5% of that amount, thus reducing the borrowers’ monthly payments.
- Pay between 5 and 10 percent using the weighted average of “their original principal sums related to those respective program levels” for borrowers with graduate and undergraduate loans.
- The amount of income that can be utilized to determine monthly payments is dramatically reduced when the threshold for doing so is raised from 150 percent of the federal poverty level to 225 percent. This will also result in lower or no monthly payments for borrowers who sign up for REPAYE.
- Borrowers who earn less than 225 percent of the federal poverty level in their discretionary income would make no payments at all but would still be eligible for forgiveness.
- When a borrower enrolled in the new REPAYE plan loses their job, their monthly payment drops to $0, but they continue to accrue forgiveness credit.
- Instead of the existing 20-year threshold for undergraduate loans and 25-year threshold for graduate loans, borrowers in REPAYE who owe $12,000 or less would receive forgiveness after 10 years of payments.
The total amount of time until earning forgiveness would increase by one year for each $1,000 borrowed in excess of the $12,000 limit until it reached 20 years for undergraduate loans and 25 years for graduate loans. For instance, a borrower with $13,000 in undergraduate debt will be forgiven after 11 years instead of the 20 years they would have been under the previous scheme. After 19 years, a borrower who owed $21,000 would be pardoned. After 20 years, a borrower who still owed more than $21,000 would be pardoned.
Borrowers would no longer be charged on accrued interest if their monthly payments fall short of covering it.
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A Form of Blanket Forgiveness Would Be Available Through REPAYE.
According to the recently proposed REPAYE changes, “any individual borrower who makes less than approximately $30,600 annually and any borrower in a family of four who makes less than approximately $62,400” would have $0 monthly payments and still receive credit toward forgiveness.[5] Even if a borrower’s income exceeds these amounts, their monthly payments on undergraduate loans would still be cut in half because their required monthly payment would decrease from 10 percent of discretionary income. Future cohorts of borrowers would experience a 40% reduction in their overall payments for every dollar borrowed, according to ED. Payments would be 83% cheaper for borrowers with the lowest predicted lifetime earnings, compared to only a 5% drop for borrowers in the top bracket.
IDR would simply become another type of general student loan forgiveness as a result of the proposed reforms. The cost of the forgiveness connected with the new REPAYE plan, according to a Penn Wharton Budget Analysis, may range from $333 to $361 billion over ten years. The same model also estimated that the Biden Administration’s one-time universal loan forgiveness plan would cost $469 billion.
Increasing Prices and Poor Incentives
Any level of student loan forgiveness has no impact on the price of higher education and may even increase prices for students since it removes colleges’ incentives to cut tuition because they anticipate being bailed out by their current and past students. With the hope that future forgiveness would endure into the future, this creates a moral hazard. Both current and prospective students will pay the same, if not higher, tuition rates, but they will do so believing that if they eventually join REPAYE, they will be eligible for significant financial forgiveness. The negotiated rulemaking procedure is being used to implement these suggested improvements to IDR. If approved, the IDR’s increased forgiveness would constitute a key and enduring component of the federal student loan program.
