The new student loan repayment plan formally proposed by the Biden administration in early 2023 has the potential to reshape the student loan system.
The new plan for income-driven repayment (IDR) would let borrowers make lower payments and have remaining loans forgiven sooner than under current plans. Under the new terms, most undergraduate borrowers with typical debt levels—and nearly 90 percent of those with certificates and associate’s degrees—would have at least some of their loans forgiven if they enroll in IDR.
What the plan does
Biden’s new IDR plan requires undergraduate borrowers to pay 5 percent of their income above 225 percent of the federal poverty level for up to 20 years. Borrowers’ balances are forgiven after 10 years if they borrowed $12,000 or less, plus 1 year for each additional $1,000 borrowed. The plan also prevents unpaid interest from accumulating when borrowers’ monthly income-based payments cannot cover it. Borrowers’ loan balances can therefore never increase while repaying under the Biden plan.
What this means for borrowers
If all certificate and associate’s degree recipients with typical debt levels were enrolled in current IDR, we would expect 62 percent to fully repay their loans. Under the Biden plan, only 11 percent would fully repay before reaching forgiveness. The share who repay no more than half would be 69 percent, rather than 20 percent.
For bachelor’s degree recipients, the share fully paying off their loan would fall from 59 percent under current IDR to 22 percent, and the share repaying no more than half of what they borrowed would increase from 22 percent to 49 percent.
For the typical Pell grant recipient at both undergraduate credential levels, the amount of forgiveness they would receive under the Biden plan would exceed the value of their cumulative Pell grants.
Few Undergraduate Borrowers with Typical Debt Levels Would Repay Their Loans under the Biden Administration’s IDR Proposal
Estimated loan repayment amounts under current IDR and the Biden IDR plan, by credential completed
Source: Urban Institute calculations based on the 2012/17 Beginning Postsecondary Students Longitudinal Study.
Notes: Current IDR = Pay as You Earn; IDR = income-driven repayment. “Pay off less than half the loan” and “Pay off at least half the loan” refer to half the original amount borrowed. Estimates are for borrowers at each credential level with typical debt levels; amount repaid varies only based on differences in starting income. See the appendix for assumptions.
Implications
The Biden plan will transform IDR from a safety net that supports borrowers with low incomes into a substantial subsidy for most undergraduate students who take on debt. Under current IDR plans, most borrowers can expect to repay some or all their debt. If the Biden plan is implemented as proposed, fully repaying a student loan will be the exception rather than the rule.
This large increase in generosity for borrowers will come at a substantial cost to taxpayers, which the Biden administration estimates at $138 billion over 10 years. The rough price tags of the individual components of the proposal are $74 billion for the 225 percent income exemption, $59 billion for the 5 percent assessment rate, $15 billion to forgive unpaid monthly interest, and $4 billion for reducing the time to forgiveness.
As the Biden administration revises its plan following a 30-day public comment period, it will have to weigh the potential costs and benefits of the various components of its proposal not just for current borrowers but for future students, taxpayers, and the US Department of Education’s ability to manage its $1.6 trillion student loan portfolio.