nder the new income-driven repayment plan, borrowers will pay up to 5% of their discretionary income for undergraduate loans and a yet-to-be-revealed weighted average rate for their graduate loans. It will also change how discretionary income is defined by increasing the amount of a borrower’s income that student loan servicers can use when calculating their payment amount from 150% of the federal poverty guidelines to 225%.
Collectively, these changes will likely make student loan payments more affordable for millions of borrowers while also increasing the number of people who are eligible for a $0 monthly payment.
The new IDR plan also has three other benefits: a faster path toward loan forgiveness, an interest waiver, and automatic annual enrollment.
Borrowers who borrowed $12 thousand or less to pay for undergrad would have their remaining loan balance forgiven after 10 years of qualifying payments rather than the 20 years it takes under other IDR plans.
Related: Income-Driven Repayment Plan Forgiveness
IDR plans are important tools that allow millions of borrowers — especially those with low incomes — to access a payment amount they can afford. But there’s a catch: those lower payments rarely cover the interest that accrues each month, which results in negative amortization — i.e., their balances increase over time despite making payments. Read more about capitalized interest on student loans.
The new plan will offer a subsidy that will cover the unpaid interest if borrowers make their monthly payments. According to the Biden administration, “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.”
Borrowers who enroll in the new plan can also opt into the IRS sharing information about their income and family size from their latest tax return with the Education Department, making it easier for them to stay enrolled.
Related: IDR Recertification Deadline 2022
The recertification process is a hurdle for many due to poor customer service from loan servicers, errors in completing the paperwork, or failure to complete it on time. Streamlining that process may let more borrowers continue making payments without fear of being kicked out of the plan due to a mistake.