In addition to the student loan forgiveness plans announced in August, the Biden administration also proposed a new income-driven repayment (IDR) plan for borrowers. IDR plans intend to help borrowers by allowing them to repay their loan in proportion to their income and offering loan forgiveness after a set number of years. Although details of the plan are still emerging, my initial calculations indicate this new plan would substantially reduce the amount borrowers pay back, increase loan forgiveness, and could allow some borrowers to repay their debts over a longer period of time, relative to previous IDR plans.
Understanding the potential effects of the new IDR plan
Under the new IDR proposal, borrower payments start at 225 percent of the federal poverty level (FPL) and would equal 5 percent of adjusted gross income above that amount for those with only undergraduate debt. Most current plans set those thresholds at 150 percent of the FPL and 10 percent of adjusted gross income. For those with graduate degree debt, the assessment rate would equal a weighted average rate (assumed to be 5 percent for the undergraduate debt share and 10 percent for graduate debt). The new plan would also forgive unpaid monthly interest so the total owed couldn’t rise above the starting balance. Borrowers would receive loan forgiveness after 20 years of repayment, and those who start with a balance of $12,000 or less would have to pay for only 10 years before forgiveness.
To better understand these changes, I modeled the effects of the Biden proposal on two hypothetical borrowers. For the first borrower, I assumed a total undergraduate debt of $30,000. The typical undergraduate borrower in 2017–18 finished their program owing a median debt of around $22,700, or roughly $26,800 for those earning a bachelor’s degree. For the second borrower, I used the same amount of debt but assumed that 25 percent was for undergraduate education and 75 percent was for graduate education (a weighted repayment rate of 8.75 percent). For graduate students with graduate and undergraduate debt in 2017–18, the median undergraduate debt was $25,200 and the median graduate debt was $52,000.
Compared with Pay As You Earn (PAYE), which is one of the more generous current plans, this new plan offers far more generous terms. Borrowers who start their careers with incomes below approximately $25,000 are projected to pay nothing in my model, compared with a similar no-pay threshold of around $17,000 under PAYE. A person with only undergraduate debt wouldn’t pay the full amount they owed, in net present value, unless they had a starting salary of around $60,700 ($46,700 for those with only 25 percent undergraduate loans). Under PAYE, those with a starting salary of at least $35,000 are projected to repay a $30,000 debt over the 20-year term.
As with all IDR plans, the generosity of the program increases with the amount borrowed. To understand how this dynamic would play out for recent borrowers, I looked at different profiles of typical borrowers, modeling monthly payments under a standard plan, PAYE, and the new Biden proposal. Compared with what they would owe under a standard plan, PAYE provides a substantial benefit for recent borrowers (especially those with large amounts of graduate debt), but the new plan lowers monthly payments even further, particularly for recent undergraduates.
Federal Student Loans Would Have Much Lower Payments Under Biden Proposal
|Working 6 years after entering undergraduate education (BPS 12/17)||Median student debt||Median salary||Standard 10-year plan monthly payment||PAYE monthly payment||Biden IDR plan monthly payment|
|No degree, not enrolled||$8,913||$24,000||$92||$48||$0|
|Attained associate’s degree||$15,798||$26,000||$163||$65||$0|
|Attained bachelor’s degree||$24,918||$32,000||$258||$115||$20|
|Working 10 years after attaining bachelor's degree (B&B 08/18)|
|Doctoral degree or professional degree||$160,707||$80,000||$1,662||$515||$384|
Source: National Center for Education Statistics’ PowerStats tables vspvog and cgkzzq and author’s calculations.
Notes: BPS = Beginning Postsecondary Students Longitudinal Study; B&B= Baccalaureate and Beyond Longitudinal Study; IDR = income-driven repayment; REPAYE= Revised Pay As You Earn. Salary and debts reported in 2017 (undergraduate) and 2018 (graduate). Repayment under the new plan is calculated with the 2018 federal poverty level and assumes borrower is single. For those with graduate debt, I assume 25 percent is undergraduate debt.
Some borrowers could experience longer repayment terms
With smaller payments, some borrowers will repay their debts for a longer time. The Biden administration hasn’t released full details on how it will subsidize interest or implement the cap on repayment for small balances. Because unpaid interest is waived, I assume small balances cannot grow beyond the amount borrowed. Offering a 10-year loan forgiveness term for starting balances of $12,000 or less creates a steep cliff for borrowers, so I assume this amount is prorated for additional years, where each year increases forgivable balance amount by $1,200.
A borrower with a starting salary of $45,000 would likely repay a debt of $20,000 in 11 years under PAYE (which caps payments at what would be paid under a 10-year plan), and 9 years under Revised Pay As You Earn (which is similar to PAYE but doesn’t have the cap). For undergraduate-only borrowers under the Biden plan, full repayment would take 17 years. Those with a 25/75 split of undergraduate and graduate debt would pay their debt slightly faster, in 16 years.
Some borrowers may prefer smaller repayment amounts over a longer time period, but others might find having debt for longer distressing. Although balances will no longer increase because of unpaid interest (negative amortization), borrowers with low incomes may still make payments but find that the balance stays at their initial amount.
Many questions remain unanswered
These calculations are just a preview of what payments could look like under the new Biden IDR plan. As with forgiveness, there are still unanswered questions:
- Who is eligible? The Biden administration will have to define who is eligible for this new plan. For example, Parent PLUS borrowers are included in plans for forgiveness but are excluded from most IDR plans. If Parent PLUS loans are included in this new plan, it would represent a substantial break from how these debts are currently serviced.
- How will the plan be implemented? Some borrowers have experienced difficulty enrolling in and staying on IDR. The new plan could be paired with improvements to the certification process, making it easier for borrowers to access lower payments and stay on the IDR plan.
- How will borrowers transition from other IDR plans? Currently, four IDR plans are available for borrowers. This new IDR option is most likely the best choice for nearly all borrowers, but it’s unclear whether those on other plans can transition to the new plan, and, if so, how their balance will be adjusted to reflect the new rules.
As these details emerge, we will gain a better understanding of how the Biden IDR plan will affect student debt balances when payments resume in the new year.