In November 2021, the Department of Education unveiled a potential new income-driven repayment plan for student loan borrowers called EICR, Expanded Income Contingent Repayment. The plan could benefit millions of student loan borrowers.
But based on the initial information released by the administration, borrowers who attended graduate programs could be left out of potential new benefits — and could even wind up being worse-off under the new plan. Here are the details.
Editor’s Update (Dec. 4, 2021): the Dept of Ed recently released its second draft EICR proposal ahead of the third round of negotiating rulemaking. This proposal is expected to change between now and the final round of edits to the proposal, but it gives a clue as to what the Department is considering. Highlights include:
- 0% of income below 200% of the federal poverty line (FPL for short). 5% of income for 200% to 300% of the FPL. 10% of income for 300% of the FPL and above.
- 20 years until forgiveness
- 0 interest for periods when your calculated EICR payment is $0 a month.
- Only undergrad loans would be eligible. Grad school loans would not be included.
Background: income-driven repayment plans
Income-driven repayment (IDR) plans describe several federal student loan repayment options that tie borrowers’ monthly payments to their income and family size.
IDR plans are critical options for borrowers, and in some cases, are required for borrowers to make progress toward key loan forgiveness programs such as Public Service Loan Forgiveness. Current IDR plans include Income-Contingent Repayment (ICR), Income-Based Repayment (IBR), Pay As You Earn (PAYE), and Revised Pay As You Earn (REPAYE).
All current IDR plans calculate a borrower’s student loan payments using a formula, which is typically applied to their Adjusted Gross Income, or AGI, as reported on their federal tax return.
An initial portion of a borrower’s income, based on the federal poverty limit for the borrower’s family size, is excluded, and payments are then based on the borrower’s so-called “discretionary income” — the amount of the borrower’s AGI above that initial poverty-based exemption.
Payments are recalculated annually, and any remaining balance at the end of the repayment term is forgiven, although this could be treated as taxable “income” to the borrower.
The current IDR plans operate as follows:
- Income-Contingent Repayment. The initial income exclusion is based on 100% of the federal poverty limit for the borrower’s family size. Payments are based on 20% of the borrower’s discretionary income, with a 25-year repayment term.
- Income-Based Repayment. The initial income exclusion is based on 150% of the federal poverty limit for the borrower’s family size. Payments are based on 15% of the borrower’s discretionary income, with a 25-year repayment term.
- Pay As You Earn. The initial income exclusion is based on 150% of the federal poverty limit for the borrower’s family size. Payments are based on 10% of the borrower’s discretionary income, with a 20-year repayment term. PAYE also has eligibility restrictions based on the disbursement dates of the borrower’s loans.
- Revised Pay As You Earn. The initial income exclusion is based on 150% of the federal poverty limit for the borrower’s family size. Payments are based on 10% of the borrower’s discretionary income, with a 20-year repayment term for borrowers with only undergraduate federal loans and a 25-year term for borrowers who have any graduate school federal loans.
Say hello to “Expanded Income-Contingent Repayment” (EICR)
The Biden administration is currently engaged in negotiated rulemaking for federal student loan programs — a long process to rewrite federal rules and regulations, resulting in significant changes to existing programs.
During last week’s session, the Department of Education tasked negotiators with discussing the specifics of a potential new IDR plan, called the “Expanded Income-Contingent Repayment” (EICR) Plan.
The Department has provided few details about EICR, and it will be up to the negotiated rulemaking committee to determine how EICR will work.
Almost every element of the new repayment plan is up for consideration, including: the payment formula, the poverty exemption, the length of the repayment term, how interest accrual and capitalization will work, and how married borrowers will be treated.
But based on the Department’s initial position, borrowers with federal graduate student loans may be targeted for more onerous repayment obligations:
Dual-track repayment terms
ICR and IBR have a 25-year repayment term, while the PAYE plan has a 20-year term. Based on written comments at the negotiated rulemaking session last week, the Department of Education appears to be considering a 20-year EICR term for undergraduates, but a 25-year term for borrowers who take out any loans for a graduate degree program.
This would make EICR similar to REPAYE, which also has a dual-track repayment term depending on whether the borrower took out federal student loans for graduate school.
Marginal repayment formula
Based on written comments at last week’s negotiated rulemaking session, the Department is considering a “marginal” approach to EICR repayment. Essentially, one formula would be applied to a borrower’s income up to a certain earnings level. Then for higher-income borrowers, a second formula would be used to capture a larger portion of the borrower’s income above that initial limit.
This would be somewhat akin to marginal tax rates. If this winds up being implemented, higher-income borrowers could wind up paying much more under the EICR plan. No other IDR plan has a marginal repayment approach.
What’s next for EICR?
None of these proposals have been finalized yet. The negotiated rulemaking committee will spend the next several months hashing out the details of what the EICR plan may ultimately look like. The committee will need to reach a consensus for any element to become finalized.
In addition to the above, the committee must also consider a number of other attributes of the program, including:
- The amount of initial income that should be excluded from the payment formula. The existing IDR plans exclude from consideration a borrower’s initial income of 100% to 150% of the federal poverty limit based on their family size. Advocates are pushing the Department to expand the EICR income exclusion to as high as 400% of the federal poverty limit. If that is universal, such a large initial income exclusion could help everyone, including graduate student loan borrowers.
- Interest benefits and subsidies. When payments under an IDR plan are below the amount of monthly interest accrual, a borrower’s overall loan balance can grow due to negative amortization, even while the borrower continues to make progress towards loan forgiveness. The Department is considering an interest subsidy for EICR when calculated payments are $0, but what that interest subsidy ultimately looks like remains to be seen.
- Treatment of married borrowers. IBR, ICR and PAYE allow married borrowers to exclude their spouse’s income from consideration by filing taxes as married-filing-separately. The REPAYE plan, however, factors in the combined income of married borrowers regardless of their tax filing status. It remains unclear how EICR would work in this regard.
- Availability of existing IDR plans. Rulemakers discussed during last week’s session whether EICR would replace all other plans or whether borrowers could continue to access existing IDR plans. The Department indicated that it could not eliminate the IBR plan because that program was established by statute, while PAYE and REPAYE were established through prior negotiated rulemaking sessions. The Department indicated last week that PAYE and REPAYE should remain intact as well. Still, some advocates want to make EICR so attractive to borrowers that it would effectively nullify the other plans. But for graduate student loan borrowers, continued access to existing IDR plans may be critical if EICR winds up being a more expensive option.
Ultimately, negotiated rulemaking is a tedious, complicated process involving multiple rounds of public hearings. It will probably take at least a year before any new programs, including EICR, are close to being finalized.