The Biden administration on Friday announced new efforts to ease and forgive student loans, as more than 40 million borrowers remain saddled with debt for their educational pursuits.
"These borrowers will join the millions of people that my Administration has provided relief to over the past two years – resulting in over $116 billion in loan relief to over 3 million borrowers under my Administration," President Joe Biden said in announcing the new plan.
The Supreme Court struck down widespread student loan forgiveness last month, ruling that Biden's plan was unconstitutional. However, on Friday, the president announced that the administration plans to forgive debt for 800,000 people through income-driven repayment (IDR) plans.
"When the Supreme Court made the wrong decision, I immediately announced a new plan to open an alternative path to relief for as many borrowers as possible, as soon as possible," Biden added in his statement.
The point of IDR plans is to give student loan borrowers the opportunity to repay their debts without significant financial hardship each month. The plan sets monthly payments based on a person's income and family size. There are four types of income-driven plans:
- Revised Pay As You Earn Repayment Plan (REPAYE Plan)
- Pay As You Earn Repayment Plan (PAYE Plan)
- Income-Based Repayment Plan (IBR Plan)
- Income-Contingent Repayment Plan (ICR Plan)
All four plans offer loan forgiveness after either 20 or 25 years of payments. However, there are different conditions for forgiveness among the plans. REPAYE offers forgiveness after 20 years for borrowers with only undergraduate loans and after 25 years for graduate or professional study loans. Under the IBR plan, forgiveness is granted after 20 years for borrowers who took out loans after July 1, 2014, and after 25 years for those who had loans before July 1, 2014.
Given how many years payments must be made before forgiveness is applied, it's possible a person could repay their loan in full before being eligible for forgiveness.
Each plan also has a different method of determining monthly payments, but all tend to be based on a person's discretionary income, which is the amount of money remaining after taxes and other necessary expenses.
The REPAYE plan is generally 10 percent of a person's discretionary income. PAYE and IBR are usually 10 percent of a person's discretionary income but will never be more than the Standard Repayment Plan amount. Borrowers who took out loans before July 1, 2014, may have to pay 15 percent of their discretionary income under the IBR plan.
Under the ICR plan, borrowers will pay the lesser amount of either 20 percent of their discretionary income or what they'd pay on a repayment plan with a fixed payment over 12 years. Federal Student Aid offers a free loan simulator to see how different plans can impact payment amounts.
All borrowers with eligible federal student loans can take advantage of the REPAYE and ICR plans. To qualify for PAYE and IBR, payments must be less than what borrowers would pay under the Standard Repayment Plan with a 10-year repayment period.
The downside to IDRs is that people end up paying more interest over time, you have to pay taxes on the forgiveness balance and a spouse's income could factor into your payment amount, according to NerdWallet.
Friday's forgiveness announcement applies to those who have already been in IDR plans. The forgiveness is the result of inaccurate payment counts, in part because certain months weren't counted when they should have been. Borrowers eligible for forgiveness will be notified.
Additionally, Biden also previously announced the SAVE repayment plan, another IDR plan that seeks to lower the cost of monthly payments for borrowers.
