What Recently Proposed Student Loan Changes Mean for Borrowers
By Rachel Puryear
Student debt, especially where the borrower has trouble keeping up with the payments and interest; eats into the ability to save and invest money. Therefore, progress on student loans which helps borrowers pay less frees up money to build wealth, and is good for greater prosperity.
If you or someone you love owes student loan debt, you will want to be aware of proposed changes that the Biden administration recently announced to the REPAYE program (Revised Pay As You Earn, the most advantageous income-based repayment program for eligible borrowers).
These changes might help you or a loved one get out of debt faster – or, at the very least, stop the balance from getting ever bigger.
The proposed changes will be open for public comment for 30 days, then may take effect later this year. (If you or a loved one needs and benefits from this relief, I encourage you to comment! See below for the link for public comment.)
Here’s the scoop:
The Current Extension of the Pause
Last year, the student loan pause had been set to expire on December 31, 2022. However, given recent legal challenges to the Biden Administration’s 2022 loan forgiveness program, the pause has been extended again.
At this time, payments are set to resume either (1) When the Department of Education is allowed to implement the aforementioned loan forgiveness program, or (2) After the litigation is resolved. However, if neither of those things has happened by June 30, 2023, then payments will resume 60 days after that – which is August 29, 2023.
So the exact date is currently uncertain, and will remain to be seen.
Reduced Monthly Payments for Lower-Income Borrowers
Under the current REPAYE program, a borrower’s monthly payments are calculated based upon 10% of a borrower’s discretionary income.
The new proposed change would instead cap the monthly payments at 5% of a borrower’s discretionary income. This cuts monthly payments in half for many lower-income borrowers.
Furthermore, borrowers making less than a specified threshold (for example, $30,500 for single borrowers, $62,400 for a borrower in a family of four) will have $0 monthly payments.
Changes to How Interest Accrues on Student Debt
For anyone whose debt has snowballed since they graduated because they have not even been able to keep up with the interest, this change is critically important.
For borrowers with $0 monthly payments, no interest will be charged to their loan so long as that’s the case.
Furthermore, for borrowers in REPAYE whose monthly payment does not cover the full amount of interest that would normally be charged to their loan each month, the amount of interest in excess of their monthly payment is waived.
This means that even if a borrower cannot pay down their loan, that the interest will not keep ballooning the amount owed, the latter of which results in loan balances growing over time instead of coming down.
The balance coming down is ideal. But if it cannot come down, at least keeping it from increasing also helps.
Automatically Enrolling At-Risk Borrowers
For borrowers behind on their payments, they would be automatically enrolled in REPAYE. Without having to ask. This skips over all those bureaucratic steps, and can help prevent credit-ruining, life-ruining student loan default.
Better Path to Loan Forgiveness
Currently, total loan forgiveness is available under REPAYE after 20 (undergraduate) to 25 (graduate or professional) loans.
However, borrowers with an original balance under $12,000.00 would be eligible after ten years, plus an additional year for each $1,000.00.
It’s not clear what happens to those whose original balances were more than $25,000.00, to where forgiveness after 25 years would get them out of debt sooner than $1,000.00 forgiven each year. Perhaps that’s something to clarify in public comments.
Furthermore, people in situations beyond solely economic hardship would be eligible for credit towards forgiveness, even if their loans are deferred. This would include people undergoing cancer treatments, and serving in the military.
Additional Tip for Those Trying to Pay Down Debt During the Pause
If your student loans are paused and you are able to pay down some of your debt in the meantime, it can be a great time to do so and reduce the principal.
Here’s a way to maximize that strategy, too – instead of making the payments regularly to your lender during the pause, set aside the money you will be paying in an interest bearing account, and only pay it right before the pause is lifted. That way, you can earn some passive interest money on it and pay even more debt down, before you have to start paying again.
Make Your Voice Heard!
There’s a loud, vocal, smug, anti-intellectual faction in the United States which vigorously opposes any kind of student loan relief, and they will scream nonsense about “personal responsibility” and “but, but, I had to pay my loan!” without appreciating the reasons why people actually get into so much student debt, and how corrupt and predatory the student loan industry has been for many years.
Accordingly, make sure you get heard, and that these people don’t shout you down. Add your voice to the discussion, and participate in this important conversation.
Go here to make your public comments heard!
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