New Income-Based Repayment Plan: How it Will Work

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Updated on September 7, 2023

The new income-based repayment plan will cap monthly payments for undergraduate loans at 5% of borrowers’ discretionary income, limit interest accrual, and wipe out some borrowers’ remaining balance after 10 years of payments. Federal loans from graduate school will receive many of the same benefits, but borrowers must pay more of their taxable income and wait 20 years before their student loan debt is forgiven.

Earlier this year, President Biden announced a plan to cancel up to $20 thousand in federal student loans for borrowers with less than $125 thousand in adjusted gross income during 2020 or 2021. He also shared details of a new income-based repayment plan the Education Department was implementing.

The proposed plan is more generous than existing income-driven repayment plans. It could cut monthly payments in half or more without the risk of a ballooning balance. It would also lead to borrowers’ federal loans being forgiven sooner.

We don’t have the full scoop on the new IDR plan yet as details are still emerging. From what we know today, once released, the plan will help borrowers by lowering the amount they need to pay back and increasing student loan forgiveness. But it could cause some to repay their loans over a longer period.

Keep reading to learn more about how IBR will change this year.

How will the new income-driven repayment plan work?

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.

Forgiveness

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.

Interest waiver

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.”

Auto-Enrollment

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.

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.

Who will be eligible for the new IDR plan?

The Biden administration has yet to define who will be eligible for this new plan. For example, borrowers with Parent PLUS Loans, Perkins Loans, and loans made through the Federal Family Education Loan Program are excluded from most IDR Plans. Similarly, only a few people are eligible for the Pay As You Earn and IBR plan for new borrowers.

The eligibility requirements for the White House’s new payment plan may be similarly limited to certain borrowers.

When will the new IDR plan be available?

The new IDR plan isn’t expected to start until the summer of 2023 at the earliest. First, the Department of Education must issue formal proposed regulations. From there, the proposal must clear several procedural hurdles, including public commentary.

There’s a chance this plan will never be implemented, or, if it is, that it will significantly change.

Will other student loan repayment plans go away?

Nearly 30 percent of federal student loan borrowers are enrolled in one of the four income-driven repayment plans:

Income-Based Repayment
Income-Contingent Repayment
Pay As You Earn
Revised Pay As You Earn

In his press release announcing the new plan, the president criticized these plans as being “too complex and too limited.” He pledged that his new plan would “simplify loan repayment and deliver significant savings to low- and middle-income borrowers.”

Does that mean the new option would replace the other payment plans? Probably not. What will likely happen is that the new IDR plan will join the other existing plans as a choice borrowers could make to repay their loans.

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