As of the third quarter of 2021, outstanding student loan debt amounts to $1.58 trillion, according to the New York Federal Reserve. However, delinquency has been falling due, in part, to the implemented forbearance measures as a result of the ongoing global pandemic.
Questions about what happens when these measures end at the beginning of 2022, along with concerns about how borrowers repay their loans, prompted the Department of Education to look into rule-making around income-driven repayment plans — including adding a fifth plan to the mix.
Let’s take a look at this new expanded income-contingent repayment plan (EICR) and how it might impact struggling student loan borrowers.
What’s income-driven repayment?
The new expanded income-contingent repayment plan would fit into a group of student loan repayment options called income-driven repayment (IDR). There are currently four IDR plans, and each has its own requirements. Plans vary according to which types of federal loans are eligible, payment plans, and more.
However, there are some basic principles that govern these plans:
- Payments are based on discretionary income.
- Discretionary income is based on your income and the federal government poverty level guidelines for your household size.
- Depending on income level, it’s possible to have payments of $0 per month.
- Loan terms are extended to 20 or 25 years, instead of the standard 10-year repayment.
- Borrowers on these plans are eligible for Public Service Loan Forgiveness, as long as they meet the other eligibility requirements.
- At the end of the loan term, the remaining balance is forgiven.
For the most part, the assumption is that EICR would also fit these basic requirements, but potentially expand the types of loans that are eligible. Another possibility is that the new plan might adjust the formula for determining the monthly payment amount.
Possible solution for IDR borrowers who still struggle with payments
The addition of the EICR income-driven option might address some of the issues that some borrowers have, even when they’re on reduced monthly payments.
A report from Pew Research indicates that 47% of those who have been on income-driven repayment feel their payments were still too high. Additionally, there’s some speculation that the new rulemaking committee could potentially introduce policies that would reduce the problems of balance growth.
The Pew survey found that most of those who had participated in income-driven repayment programs owed just as much as — or even more than — what they originally borrowed even after years of making payments.
What’s different about the Expanded Income-Contingent Repayment Plan?
There are currently four income-driven repayment plans:
- Income-Contingent Repayment (ICR)
- Income-Based Repayment (IBR)
- Pay As You Earn (PAYE)
- Revised Pay As You Earn (REPAYE)
Details about the new EICR plan are relatively murky, mainly because rulemakers need to work them out. Here’s what we know so far about the expanded income-contingent repayment plan.
Eligible student loans
First of all, the rulemakers haven’t decided which student loans will be eligible for EICR. However, there’s some hope that Parent PLUS Loans might be included. Expanded Public Service Loan Forgiveness left Parent PLUS Loans out; there’s speculation that this blow could be softened through the new plan.
Borrowers with older student loans made under the FFEL program, though, might be out of luck. Because this is included as an income-contingent repayment (ICR) plan, FFEL loans are specifically excluded. However, FFEL loans might be included if they’re paid off using a Direct Consolidation Loan.
Monthly payment calculation
Currently, for income-driven repayment plans, discretionary income is considered and then a percentage of that income is used to calculate monthly payments. However, for EICR, the rulemaking committee is interested in exploring alternative ways to figure out a monthly payment.
One suggestion is using a marginal approach, similar to how taxes are calculated. For example, if you earn a higher income, you might pay a higher percentage of your discretionary income. Under the current plan, if your discretionary income is $20,000 and you qualify the REPAYE plan, you would pay 10% of your discretionary income, or about $167 per month.
However, with a marginal approach, those with a lower discretionary income would still pay 10% (or whatever the rulemakers decide). Conversely, higher-income borrowers would pay a larger percentage of their income. Rather than paying a uniform percentage across borrowers in a plan, those with higher incomes could end up paying 20% or even 30% of their discretionary income.
Borrowers more interested in paying less in interest or paying off their loans faster might prefer this approach, but those who are focused on monthly payments and cash flow are unlikely to benefit as much from a marginal approach.
Depending on the plan, some income-driven plans (PAYE and REPAYE) offer limited interest subsidies when the accrued interest is greater than the calculated monthly payment. There’s also an interest benefit under the IBR plan in times of hardship. The current ICR plan doesn’t offer interest benefits at all.
One proposal for the EICR plan is to reduce the rate at which interest accrues when calculated payments are $0 per month. However, any subsidy still needs to be considered, and a formula for determining the accrual rate would need to be established.
Right now, repayment on income-driven plans is based on whether graduate loans are included in the plan. For those with undergraduate loans only, the remaining balance can be forgiven after 20 years, while graduate loans on income-driven repayment have a term of 25 years.
So far, the Department of Education expects to continue that distinction between undergraduate and graduate debt. However, there hasn’t been a set rule on how long the repayment lasts until the remaining balance is forgiven. That’s still under consideration.
Currently, when determining discretionary income, if married borrowers file separately, their spouse’s income isn’t considered for the IBR, PAYE and ICR plans. However, under the REPAYE plan, it doesn’t matter what filing status is used — spousal income is considered.
No decision has been made about married borrowers and income for the EICR plan.
What’s next for EICR?
Rulemaking sessions are ongoing and open to the public. If you have thoughts about how the expanded income-contingent repayment plan should operate, you can send your comments ahead of time.
For now, there isn’t a lot that we know about what the new plan will look like. However, there are continued concerns over enrollment in income-driven repayment plans.
The Department of Education has found in the past that federal loan servicers don’t always comply with requirements, and that can lead to frustration and confusion for borrowers. Additionally, the Pew survey indicates that just enrolling in an income-driven plan can be difficult. Creating a fifth plan, with its own rules, could potentially add to the confusion.
The next round of hearings and public comment takes place December 6-10, 2021. You can email comments to [email protected] and check the registration policy by visiting the Department of Education’s rulemaking page.