Income-Driven Repayment Changes to Create ‘Student Loan Safety Net’

The Biden administration is moving forward on a sweeping plan to overhaul how student borrowers can repay their loans, though advocates want the Education Department to go further in its plan, while critics cite the price tag as an area of concern.

The Education Department on Tuesday unveiled the details of its planned overhaul of income-driven repayment, which could transform the financing of higher education by providing more generous student loan repayment and forgiveness terms. The proposed regulations will open for 30 days of public comment today. The plan, which was initially announced in August alongside student loan forgiveness, is moving forward despite criticisms and promises of oversight from Republican lawmakers who now control the House of Representatives.

Department officials touted the changes in a media briefing as a new promise to current and future borrowers that would permanently fix a “broken student loan system.” Education Secretary Miguel Cardona said the department would strengthen accountability of postsecondary programs in part by publishing an annual list of programs considered to provide the least financial value in the country. How that list will be built is still up in the air, and the department is seeking public input.

“We’re changing the culture that higher education isn’t affordable in America, especially for Black and brown and other underserved students,” Cardona said. “College graduates earn about a million dollars more throughout their careers [than] those with high school diplomas alone. It’s unfair that only some people in America have that opportunity. For more Americans to realize the benefits of higher education, we must make paying student loans more affordable.”

Cardona’s team at the department has worked steadily over the last few years to forgive millions in student loans and fix several debt-relief programs that didn’t work as intended. The overhaul of income-driven payment is the culmination of those efforts and likely to be the most far-reaching and costly.

“For the first time, we’re creating a student loan safety net in this country,” said James Kvaal, under secretary for education.

The department is planning to simplify the income-driven repayment program and make the program more fair. The program currently allows individuals to make payments that are calculated based on their discretionary income and family size for either 20 to 25 years and then see their remaining balances forgiven.

The proposed changes would cut payments in half for undergraduates, with a cap of 5 percent on a borrower’s discretionary income. Graduate student borrowers’ payments will be capped at 10 percent for their discretionary income, which is the difference between an individual’s annual income and 150 or 100 percent of the federal poverty level, depending on the specific repayment plan. The administration is proposing to protect up to 225 percent of the federal poverty level from repayment.

Borrowers who take out $12,000 or less in loans would qualify for relief in 10 years, and they likely wouldn’t have to make any payments during those 10 years. The proposed regulations would exempt the first $30,500 that a single individual with no dependents makes from the payment calculation.

In another change, borrowers won’t see their balances grow as long as they make monthly payments, as unpaid interest will be waived—a key change praised by many advocates. Borrowers who are at least 75 days behind on their payments will be automatically enrolled in the IDR plan that offers the lowest monthly payment under the proposal. Those in default also will have access to IDR.

‘An Affordable Lifeline’

“For nearly three decades, IDR has failed to live up to its promise of an affordable lifeline for federal student loan borrowers,” said Persis Yu, deputy executive director of the Student Borrower Protection Center. “Instead, the program perpetuated an inescapable debt trap—leaving millions of borrowers vulnerable to devastating collection tools. By canceling any unpaid interest each month, reducing monthly payments, and providing access to defaulted borrowers, the Biden administration has begun to deliver on the original promise of IDR.”

Currently, borrowers can be enrolled into one of several repayment plans, but this latest proposal will phase out most of the other plans except the Revised Pay As You Earn plan and the income-contingent repayment plan, which is available to borrowers with Parent Plus loans. Those Parent Plus loans won’t be eligible for the more generous repayment plan, though advocacy groups already are calling on the administration to include them.

Carrying out the ambitious overhaul and other policy initiatives will be a challenge for the department after the Office of Federal Student Aid did not receive additional funding for fiscal 2023. However, senior administration officials said they plan to move forward with plans to carry out the changes this year.

Over all, the changes are expected to have a net budget impact of $137.9 billion over the next 10 years, though that estimate assumes the administration can carry out its plan to forgive up to $20,000 in student loans for eligible Americans and that the volume or quantity of loans issued won’t change under the new terms.

Preston Cooper, a senior fellow at the Foundation for Research on Equal Opportunity, a market-friendly think tank, said the department’s estimate should be considered on the low end of what the revamped IDR will eventually cost. He estimated the price tag is in the range of $300 to $400 billion.

He expects to see more borrowers switch to an IDR plan if the proposal is fully implemented and for more students to take on more debt—both of which would increase the cost of the program changes.

“The Education Department has a long history of underestimating costs of student loans,” Cooper said.

Advocacy groups generally praised the new plan while highlighting some changes they would want to see in the final rule.

“This plan is a step in the right direction that will provide a meaningful path forward for borrowers trapped in a never-ending cycle of student debt,” said Cody Hounanian, executive director of the Student Debt Crisis Center, in a statement. “At the same time, we hear and echo the voices of our two-million supporters who say this plan does not go far enough. Parents, graduate students, and those sinking in the quicksand of compounding interest will double their advocacy to ensure the administration’s reforms benefit those who need it most.”

Representative Virginia Foxx, the North Carolina Republican who chairs the House Education and Workforce Committee, said in a statement that the changes would “turn the federal loan program into an untargeted grant with complete disregard for the taxpayers that fund it.”

“Today’s announcement is a repeat of the same playbook that got us into this college affordability crisis in the first place,” said Foxx. “Because President Biden couldn’t get his radical free college agenda through Congress, he has resorted to doing it through the backdoor by executive fiat.”

After 30 days of public comment, the administration will review the feedback and then release a final rule, which officials expect to go into effect this year.

Accountability Measures

Critics of the Biden administration’s debt-relief measures, including the IDR overhaul, have said they don’t address the root causes of the ballooning student debt balance, including the cost of college and programs that leave students with high debt loads they can’t pay off.

“If we’re going to invest in affordability, we need greater accountability for colleges that leave students with unaffordable debt,” Kvaal said. “Higher education is an excellent investment, but there are so many programs that leave most of their graduates unable to afford their student loans. It’s time to name names about these programs and have a frank conversation about the root causes of unaffordable student debt.”

Over the next 30 days, the administration is seeking public input on the data and metrics that should be used to create a list of “low-financial-value postsecondary programs,” which is one prong of the Biden administration’s plan to increase accountability from colleges and universities.

Institutions on the list will have to provide the department with improvement plans, according to a department fact sheet. Students also will receive a warning before they receive federal financial aid to attend a program considered to have a low financial value. This spring, the department is expected to release new gainful-employment regulations for programs at private for-profit colleges and certificate programs at other institutions as part of another accountability measure.

Cooper said he would like stronger accountability measures accompanying the income-driven repayment changes.

“If students are unable to pay back their loans in full, maybe the programs that they attended are not something that the federal government should be funding,” he said. “The Biden administration has made a few noises about trying to increase accountability, but I would argue what they’ve offered is nowhere near sufficient to address the scale of the challenge.”

The list is better than nothing, he said.

Lanae Erickson, senior vice president for social policy, education and politics at Third Way, a center-left think tank, said in a statement that more must be done to address the causes of the student debt problem.

“To prevent the borrower protections announced today from becoming a band-aid fix that does nothing to solve the problem, or worse, even incentivizes further price hikes and unaffordable debt, federally-funded college programs must be held to basic standards of quality,” Erickson said.

Jason Altmire, president of Career Education Colleges and Universities, an organization representing for-profit institutions, said he was encouraged that the department was seeking input on how to create the list. He’s planning to form a task force of member institutions to come up with recommendations.

Any list, he said, should apply to all institutions in all sectors. He worried that such a list wouldn’t take into account “that many career schools provide valuable graduates to important occupations in society that don’t make a lot of money.”

“That’s a societal issue, not a school issue,” he added.

David Baime, senior vice president for government relations at the American Association of Community Colleges, said he would expect community colleges and other institutions of higher education to discourage the department from developing the proposed list.

“We will enthusiastically encourage them to continue to do all they can to provide detailed programmatic data on earnings, as well as on the experience of borrowers in the program and the manageability of debt for people who borrow for a given program,” he said.

Jon Fansmith, assistant vice president for government relations at the American Council on Education, said the department’s request for information makes sense and his organization supports better data and more transparency.

“We’ve said before that if you can’t justify the outcomes for students in your programs, then you need to take a really long, hard look at those programs and decide whether you should be offering them,” he said.

He added that in creating the list, it will be “fundamentally complicated” and tricky to determine financial value of programs for careers that don’t have high earning potential, such as social work.

“There are some things that have a value, beyond the return on investment, that as a society we should be investing in,” he said.