Along with student loan forgiveness, the Biden administration announced a new income-driven repayment plan. This plan is hoping to fix or resolve common problems with the existing income-driven repayment plans such as, income-contingent, income-based, pay-as-you-earn, and revised pay-as-you-earn. 

Let’s go through the details of the proposal—yes, the proposal, this plan is not approved or yet in effect. But we can highlight what we know so far. 

New Income-driven Repayment Plan

Now the new income-driven repayment plan announced is just a proposal, as of now. There are several steps that need to happen before the repayment plan becomes an option for borrowers. We don’t have a timeline for that, but we do know some high-level details. 

Monthly Payments

The new income-drive plan would cap payments at 5% of discretionary income for undergraduate loans. For borrowers with both undergraduate and graduate loans, they will pay a weighted average rate. 

In addition, the payments under this plan will cover a borrower’s monthly interest charges, which is major. Current income-driven plans do not guaranty that borrower monthly payments will cover monthly accruing interest, and some borrowers in these plans see their total balance stay the same or increase after years of payments. The U.S. Department of Education has even stated that borrowers who make their monthly payments, will not see their loan balance grow—even if their monthly payment is $0 based on their income. 

New Income-driven Plan Forgiveness

After 10 years of payments, for borrowers with an original principal balance of $12,000 or less, any remaining balance will be forgiven. Currently borrowers in existing income-driven plans will pay their monthly payment for up to 20 – 25 years (depending on the plan) regardless of their original principal balance. 

What is an Income-driven Repayment Plan? 

Income-driven repayment plans are a type of repayment option offered to federal student loans. It’s rather unique because your monthly payments are tied to your income and not your outstanding debt. These plans typically cap your monthly payment at a percentage of your “discretionary income” or your 10-year standard repayment plan, except for the income-contingent and revised pay-as-you-earn plans. 

Discretionary income is the difference between your income and either 100% or 150% of the poverty guideline for your family size and state of residence. Depending on the income-driven repayment plan, your payment will be 10% - 20% of your discretionary income. Most income-driven repayment plans have a payment cap of your 10-year standard repayment plan, while others do not have this cap—like the income-contingent and revised pay-as-you-earn plans—and your monthly payment can be more than your 10-year standard repayment amount. 

Monthly payments under current income-driven repayment plans can be as low as $0 per month, and while some have interest subsidies, it is possible that your monthly payments will not cover your monthly accruing interest. This has led to situations where a borrower’s student loan total debt has increased, even after making payments. When a borrower’s monthly payments do not cover accruing interest, this phenomenon is known as negative amortization. 

These plans also come with student loan forgiveness after 20-25 years of payments. And thanks to the American Rescue Plan of 2021, any amount forgiven on a student loan will not be considered federal taxable income through 2025. 

Details We Don’t Have

Honestly, this list can go on and on. But for now, here a few things we are waiting to hear.

1. When will this new income-driven repayment plan become available for borrowers? Well, the proposal was just announced, and the new plan will need to go through the approval process—which involves proposal request for comment, a public comment period, responses, and final rules. That will take some time, but we will have to keep an eye out on the progress.
2. Who will be able to enroll in the new income-driven repayment plan? When income-driven repayment plans were created in the past, the new plan would only be offered to new borrowers. As of right now, there is no indication on who would be eligible for this plan. If existing borrowers can choose the new plan once it is available, there will be a lot of details that need to be explained—like, how past payment history will be considered and applied.
3. What loans will be eligible for the new income-driven repayment plan? Income-driven repayment plan options are only available for federal student loans. And  something we’re used to questioning since 2020. Not all federal student loans are the same, and there are two main classifiers: federally held, and non-federally held loans. We aren’t sure which federal student loans will be eligible for this new income-driven repayment plan.
4. How many of the details (you just explained) will change? We have a high-level overview of the new income-driven plan proposal, but there are several steps that need to take place before the plan is officially unveiled. We don’t know if the way it has been presented will remain the same, and only time will tell. 

What To Do in the Meantime? 

Continue making payments as required. For borrowers with federally held loans, payments are not currently required, and interest rates are at 0% through Dec. 31, 2022. If there is a chance your entire federal student loan balance will not be forgiven come Jan. 2023, you should begin determining the best way to continue making payments on your loan. That means you have a few months to look at your budget and make sure you can accommodate your student loan payments.