June 24, 2021

What A New Income Based Repayment Plan Could Mean For Student Loan Borrowers

What A New Income Based Repayment Plan Could Mean For Student Loan Borrowers


Last week, the Biden administration announced that it would begin a comprehensive review of several popular federal student loan programs, including income based repayment plans. And that could mean big changes down the road for student loan borrowers.

Income based repayment plans — known more broadly as “Income-Driven Repayment (IDR) — are federal student loan repayment plans that allow borrowers to have affordable monthly payments, even for large loan balances. The plans utilize a formula applied to a borrower’s income (typically their Adjusted Gross Income as reported on their federal tax return), adjusted for family size. Payments are recalculated every 12 months. If any balance remains after 20 or 25 years, depending on the specific plan, that remaining balance is forgiven. This type of student loan forgiveness could be treated as taxable income to the borrower under current law, although Congress has temporarily exempted student loan forgiveness from federal taxation through 2025.

The Biden administration’s review of income-driven repayment programs will be conducted through a process called negotiated rulemaking, which involves a review and possible rewrite of federal regulations. The process starts with a series of public hearings, followed by rounds of rule-drafting and public comment periods.

Unlike legislative bills, which must be approved by Congress to enact new statutory programs, federal regulations are rules issued by federal agencies under existing law. Federal agencies can use negotiated rulemaking to tweak or even substantially change or add to existing federal programs without having to involve Congress at all. The negotiated rulemaking process was utilized by the Obama administration to create two completely new income-driven repayment plans without any involvement from Congress: Pay As You Earn (PAYE), which was established in 2012, and Revised Pay As You Earn (REPAYE) in 2015. These programs resulted in a substantial reduction of monthly payments for millions of student loan borrowers. The PAYE and REPAYE regulations were drafted under the umbrella of an older income-driven repayment plan called Income-Contingent Repayment (ICR).

It is quite possible that the upcoming negotiated rulemaking sessions announced by the Biden administration could be similarly utilized to improve existing income-driven repayment plans, or possibly even replace these plans a superior one. While it is far too early to know what a new income-based repayment plan may look like, Biden had proposed a new income-driven repayment plan during his presidential campaign last year. The key feature of his proposal was a dramatic reduction in monthly payments. Currently, all of the existing income-driven plans use a formula applied to a borrower’s “discretionary income” — the amount of their Adjusted Gross Income above a poverty exemption limit. The formulas range from 10-20% of the borrower’s discretionary income, depending on the plan. Biden had proposed a new plan that would only require borrowers to pay 5% of their discretionary income. If enacted, this would amount to a 50% reduction in payments as compared to the PAYE and REPAYE plans, currently the most affordable income-driven repayment plans.

Other possible reforms to income based repayment programs are sure to come up during the course of negotiated rulemaking, such as the following:

  • Shorter repayment term — Most student loan borrowers must repay their loans for 25 years before getting their balance forgiven. But some borrowers, such as those eligible for the PAYE plan, and borrowers paying their loans under REPAYE who have no graduate school loans, can obtain loan forgiveness in 20 years.
  • Factoring in expenses — Biden’s plan during his 2020 campaign would have allowed student loan borrowers to factor in their household expenses. Currently, income-driven plans do not consider a borrower’s expenses.
  • Taxation on loan forgiveness — Currently, student loan forgiveness under income based repayment plans may be a taxable event for borrowers, leading to a so-called “tax bomb” at the end of a borrower’s repayment term. Congress recently exempted federal student loan forgiveness from taxation by inserting a provision into Biden’s recent stimulus bill, but this exemption is temporary, expiring at the end of 2025.
  • Interest accrual — One of the problems with the current income-driven repayment plans is that monthly payments may not be high enough to cover ongoing interest accrual. This can lead to dramatic balance increases over time, even while the borrower makes on-time payments and progresses towards eventual loan forgiveness. It can make loan payoff far more expensive or even unattainable, and could also lead to an even larger “tax bomb” at the end of the repayment term. PAYE and REPAYE, the two newer income-driven plans, included interest benefits designed to mitigate interest accrual or capitalization, but these benefits ultimately have failed to stop runaway balance growth. A new income-driven plan could potentially include more aggressive protections, such as hard caps on interest accrual.
  • Parent PLUS loans — Federal Parent PLUS loans, which are loans issued to parents for their child’s undergraduate education, are largely excluded from income-driven repayment plans. Parent PLUS loans that are consolidated via the federal Direct consolidation program can be repaid under the Income-Contingent Repayment (ICR) plan, but this plan is far more expensive than other income based options. Since the creation of PAYE and REPAYE, the struggles of Parent PLUS borrowers have gained attention, which could increase the chances that Parent PLUS borrowers would benefit from reforms to these repayment programs.

The first public hearings reviewing these and other federal loan programs are scheduled to begin later this month. But negotiated rulemaking is a long process. It will be months before student loan borrowers will have a clear picture about what reforms to income based repayment programs may look like, and likely one to two years before new regulations are finalized.

Further Reading

Biden Administration Will Review Income Based Repayment, Student Loan Forgiveness Programs

Will Biden Cancel Student Loan Debt? We May Know Soon

Biden’s Student Loan Forgiveness Review: Should You Take Steps Now To Get Student Debt Cancelled Later?

If You’ve Been Paying Your Student Loans, You May Be Entitled To A Refund



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