New student loan plan slashes monthly payments, interest

Short was about to begin making payments on his federal student loans, which were in forbearance, in early 2020. At the time, he was making pretty good money working in the hotel industry, but putting even 10% of his discretionary income — $690 — toward student debt each month would require sacrifice, he says.

“The payment plan at 10% is a lot of money,” he says — much more than he thought when he was 18 and taking out those loans. He wondered: “What am I going to do now to afford my student loan payments? Would I have to sell my car or move in with family? I was already in the smallest apartment I could get in Kansas City.”

Then Covid hit and Short was laid off from his job. He’s since found new work as an assistant property manager, earning less than what he used to make, and has been taking advantage of the student loan moratorium. But the thought of resuming payments at 10% of his income by January 2023 was a burden.

Under the newly proposed income-driven plan, Short says the 5% income cap will be “life-changing,” and notes that he’ll benefit from the increased threshold for non-discretionary income.

For existing plans, the threshold that’s shielded from being used for loan repayments is 150% of the poverty level, or $20,385 for a single person in 2022. Under the new plan, the Department of Education would raise the amount of money borrowers can keep to 225% of the poverty level, or $30,577 per year for a single person.

This also ensures any borrowers making the equivalent of a $15 hourly minimum wage or less won’t have to make any payments on their loans under the plan.

The increased threshold for non-discretionary income is “a big recognition that people have many other things on their plate,” Peller says, like rising costs for food, housing, child care and other essential needs.

Under the new payment plan, Short expects to pay around $200 per month on his federal loans, a “much more manageable amount, and not an ‘I’m moving back in with my parents’ situation,” he says.

“It is a good step in recognizing that borrowers over the past decade needed some assistance, and getting that assistance will have a positive impact for people’s financial future over several decades,” he adds.

Another major impact of the proposed payment plan is that borrowers will no longer accrue interest on their loan as long as they make their qualified monthly payment, which could be $0 for those with low income.

That’s “a really big deal” for low-income borrowers, Peller says: Currently, if a borrower’s income is low enough, their payment may not cover the monthly interest on their loans. If that’s the case, then the remaining unpaid interest gets capitalized and added to the loan principle. This “essentially balloons the payments and puts people in a cycle of never being able to make forward progress on their student loans,” Peller says.

Getting rid of accruing unpaid interest means that “unlike other existing income-driven repayment plans, no borrower’s loan balance will grow as long as they make their monthly payments,” the White House said.

Eliminating unpaid interest could help Christian Blair, 29, an attorney in Houston. He graduated from law school at the University of Kansas in 2018 with roughly $170,000 in federal student loans, though some of that also came from his undergrad years.

Since taking out those loans, though, unpaid interest has tacked on another $30,000 to his principle.

The draft rule for the income-driven repayment proposal will be published on the Federal Register in the coming days and open to public comment for 30 days afterward. A Department of Education spokesperson said it could not comment on the timing of plan availability, though experts like Peller say it could open up by summer 2023.

A few big questions remain: Who will be eligible for the program, which types of loans qualify and how will people enroll?

“In the past, income-driven repayment options are really good, but require a lot of care and attention by the borrower, with requirements to recertify their income every year and make sure they’re getting their information in on time to servicers,” Peller says.

“It’s going to require a good amount of clear communication to people so they don’t feel they’re expecting something they’re not eligible for, and more importantly, so they don’t miss something they are eligible for,” she adds.