Written By Adam S. Minsky, JD
Earlier this month, the Biden administration announced a significant overhaul of income-driven repayment (IDR), a category of federal student loan repayment plans that allows borrowers to make payments according to their income and family size.
The Biden plan involves remaking Revised Pay As You Earn (REPAYE), an existing IDR plan, to have greater benefits in the form of lower monthly payments, limits on interest accrual and, in some cases, faster student loan forgiveness. While the advantages of the new program will be somewhat uneven, borrowers with student loans from graduate school may still come out ahead due to the changes.
Here's a breakdown.
Biden’s new Income Driven Plan: How will it work?
The REPAYE plan is the newest IDR plan, first established in 2016 after Pay As You Earn (PAYE), Income Based Repayment (IBR) and Income Contingent Repayment (ICR).
Like all IDR plans, monthly payments under the REPAYE plan are based on a percentage of a borrower’s “discretionary income” – the amount of their Adjusted Gross Income (AGI) as reported on their federal tax return in excess of a federal poverty limit for their family size.
Each IDR plan has distinct features, including payment formulas and poverty exclusion. REPAYE in its current form has some of the more favorable attributes, including an income exclusion of 150% of the federal poverty limit (as compared with 100% for the ICR plan) and a discretionary income formula of 10% (as compared to 15% for most borrowers on IBR and 20% for ICR).
Under the current version of REPAYE, borrowers who only have undergraduate student loans can receive loan forgiveness after 20 years of repayment, while borrowers who have any graduate school loans would have to make payments for 25 years before receiving loan forgiveness. This timeframe can be shortened through Public Service Loan Forgiveness (PSLF), which allows student loan forgiveness in as little as 10 years for borrowers who work in qualifying nonprofit or government jobs.
The proposed overhaul to REPAYE would make a number of improvements, and while these improvements will benefit undergraduate borrowers the most (i.e., student loan forgiveness in as little as 10 years for undergraduate borrowers with small initial balances), borrowers with student loans from graduate school will see some positive changes, too.
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More borrowers will pay zero under Biden’s new student loan repayment plan
Most borrowers, including borrowers with federal graduate school debt, will benefit from the increase in the initial income exemption from 150% of the federal poverty limit to 225%. This means that for all borrowers, a larger portion of their income will not be subject to the payment formula.
Under the proposed changes, a federal student loan borrower with a family size of one with an Adjusted Gross Income (AGI) of $30,500 or less would pay nothing under the new plan, according to the Education Department, regardless of whether their student loans were for an undergraduate or graduate school education. And since the income exclusion is adjusted based on a borrower’s family size, a borrower with a family size of four and an AGI of less than $62,400 would also pay nothing.
Many graduate school borrowers will see reduced monthly student loan payments under Biden’s plan
The overhaul of the REPAYE program will result in a dramatic reduction in monthly student loan payments for borrowers with only undergraduate student loans. In addition to the increased income exclusion limit, the REPAYE plan payment formula for these borrowers will be cut in half, from 10% of discretionary income to 5%.
But many borrowers with graduate student loans will still see a reduction to their monthly student loan payments, even if it’s not as dramatic of a drop as it would be for undergraduate borrowers. At a minimum, due to the higher 225% federal poverty limit income exemption, most graduate school borrowers would see at least a marginal reduction in their student loan payments under the new version of REPAYE.
Depending on their relative proportions of graduate and undergraduate federal student loans, these borrowers may also see a reduction in payment formula.
Borrowers with only graduate school loans will still pay 10% of their discretionary income under REPAYE, as is the case under the current version of the plan. But borrowers with a mix of undergraduate and graduate student loans will pay somewhere between 5% and 10% based on the weighted average of the undergraduate-to-graduate loan ratio. So a borrower who had an even split between graduate school loans and undergraduate school loans would have to make payments based on 7.5% of their discretionary income.
Related: 10 steps to free college for your entire family thanks to Biden’s new IDR plan
Married student loan borrowers will see benefits under Biden’s plan
The current version of REPAYE treats married borrowers differently than all the other IDR plans. Spousal income is factored into the REPAYE payment calculation, regardless of whether the borrower filed taxes jointly or separately with their spouse. In contrast, married borrowers can file taxes separately under the IBR, ICR and PAYE plans to exclude spousal income (although this could cause some households to pay higher taxes in some instances).
Under the proposed REPAYE overhaul, the treatment of married borrowers under REPAYE will mirror their treatment under the other IDR plans, meaning married borrowers can exclude spousal income by filing taxes separately. This is significant, as currently, the only option for many borrowers wishing to exclude spousal income is to go with the more expensive IBR plan.
Notably, borrowers who file taxes separately from their spouse will no longer be able to include their spouse in their family size, which may blunt some of these benefits. However, the ability to file taxes separately under REPAYE will substantially lower the monthly student loan payments for many – including graduate school borrowers.
Interest benefits of Biden’s student loan repayment overhaul
The overhauled REPAYE plan will also include interest benefits for undergraduate and graduate school borrowers.
Currently, when a borrower’s monthly payment is less than the amount of normal monthly interest accrual, their loan balance may increase over time, even while the borrower makes monthly payments. This balance growth, called negative amortization, is somewhat mitigated by an interest subsidy currently available through REPAYE, but it only slows balance growth – it doesn’t stop it.
The new version of REPAYE would eliminate negative amortization altogether. This means that interest would not accrue in excess of a borrower’s required monthly payment. “Under the Department’s proposed regulations, borrowers won’t see their balances balloon while making regular payments, including those who have a $0 payment,” notes the Education Department.
Next steps
Borrowers cannot yet access the overhauled REPAYE plan’s benefits. The Education Department released the final proposed regulations earlier this month, but there are several additional steps – including a public comment period – before they become effective. The Education Department has not provided a concrete timeline for program availability.
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If you have a mix of both undergrad and graduate loans (~44/56), will targeting one over the other matter in the long-term?
Would it make more sense to target the undergrad loans (with smaller principle and accrued interest)? Would it make more sense to attack the larger (+$20k) grad loan balance to eliminate it and only have to oay 5% of your discretionary income for the undergrad loan for the rest of the payment period?
Hi Kay,
It’s very difficult to assess what would be best for a specific situation and loan balance outside of having all of your information and doing the due diligence of the consultation process. Generally, when paying loans off in full, you’d prioritize higher payments to the higher interest rate loans and their principal balances. When pursuing forgiveness, you’d generally want to avoid any overpayment. The 5% vs 10% for the proposed REPAYE changes would be pro-rated based on portion of your balance regardless so that trick likely wouldn’t be fruitful.