New federal student loan repayment plan aimed at low-income borrowers

WASHINGTON — The U.S. Department of Education unveiled a proposal Tuesday that would overhaul a federal student loan income-driven repayment plan, and, if implemented, could help millions of low-income borrowers.

However, it’s unclear how the agency would be able to finance the program. Many student debt relief advocates also criticized the proposal for leaving out graduate students and parental loans.

The federal agency that would implement the plan, the Office of Federal Student Aid, handles the loans of 44 million borrowers. But it was not given an increase in its $2 billion funding in the recent $1.7 trillion government spending bill that covers the current fiscal year.

In a call with reporters late Monday, senior administration officials said funding their new plan would be difficult. 

“It’s true that we were very disappointed with the level of funding we received from Congress for Federal Student Aid,” a senior administration official said. “And that’s going to make it a challenge for us to carry out a number of our policy initiatives.”

Changes in plan

Under the proposed rule, undergraduate borrowers would only be required to pay 5% of their income toward their loans, which would be down from the 10% required under the current income-driven repayment plan.

The proposed rule would also amend the “Revised Pay As You Earn” federal plan to offer zero monthly payment plans to any borrowers who make less than $30,600 a year and any borrower in a family of four who makes less than $62,400. 

“The proposed regulations would also ensure that borrowers stop seeing their balances grow due to the accumulation of unpaid interest after making their monthly payments,” according to the Department of Education’s website. 

The department’s goal is to implement the program this year, officials said. However, rule making can be a lengthy process, which can even take longer if there are legal challenges. Public comment will be open on Wednesday for the proposed rule. 

Pathway to forgiveness

U.S. Education Secretary Miguel Cardona said in a statement that the proposed regulation will help create a faster pathway to federal loan forgiveness and help those borrowers avoid defaulting on their loans.

“We cannot return to the same broken system we had before the pandemic, when a million borrowers defaulted on their loans a year and snowballing interest left millions owing more than they initially borrowed,” he said. 

More than 43 million Americans have student loan debt, and the Federal Reserve estimates that the total U.S. student loan debt is more than $1.76 trillion.

If implemented, the department estimates that federal loan borrowers who are low income would see payments that are 83% less, while federal loan borrowers who make higher incomes would see a 5% reduction. 

Federal student loan borrowers who went to community college would be debt free within 10 years if the program is implemented, the department said. 

The move comes as the Biden administration’s larger plan for student loan relief is tied up in the courts and under a nationwide injunction awaiting a U.S. Supreme Court hearing and ruling.

The court action has prevented the administration from implementing its plan for one-time student loan debt cancellation of up to $20,000 for millions of borrowers.

The Supreme Court will hear oral arguments on the case Feb. 28.

Criticism of proposal

The Committee for a Responsible Federal Budget, a bipartisan think tank focusing on government spending, criticized the plan announced Tuesday and argued that if implemented it would lead to more student loan borrowing and drive up tuition costs. 

Maya MacGuineas, the president of the group, said in a statement that “it now looks like the Biden Administration’s student debt proposals could cost $600 billion, or perhaps even more.” 

“The Administration should abandon their unilateral effort to remake higher education financing, and instead work with Congress on a thoughtful package of reforms that truly address college costs and value,” she said.

The deputy executive director of the Student Borrower Protection Center, Persis Yu, said in a statement that while the proposals are significant, the Department of Education should go further by including Parent PLUS loans and graduate student loan borrowers in the program.

Parent PLUS loans allow parents to borrow money for a dependent’s higher education, and those loans are on an income-driven repayment plan. The loan cannot be transferred to the child and is the sole responsibility of the parent.

There are about 4 million Parent PLUS loans, according to Student Loan Hero.

Yu argued that many low-income families of color are more likely to rely on Parent PLUS loans and students of color are more likely to “need to get a graduate degree to earn the same salary as their wealthier white peers.”

“Equity demands that these borrowers have equal access to an affordable payment plan and the necessary supports to free themselves from the crushing weight of student debt,” Yu said.

The president of the Student Debt Crisis Center, which advocates for student loan debt relief, Natalia Abrams, made similar criticisms in a statement. 

“Unfortunately, the plan repeats past mistakes that leave too many holes in the student loan safety net,” she said. 

“Parents are excluded from the new benefits even though many are shouldering their children’s debt on top of their own debt. And, graduate students are blocked from the full benefits of the plan despite them carrying higher, more unaffordable monthly payments.”

Abrams called for a broad-based debt cancellation plan and reforms that would benefit all borrowers.