Borrowers can expect lower monthly bills and faster remittance under the latest IDR changes.
Unfortunately, some will benefit much more than others.
The new IDR program will likely benefit most borrowers, but the new rules for calculating monthly payments could disappoint many teachers and social workers.
The basics of Biden’s new IDR plan
The headline on the new IDR payment is that monthly payments are being lowered to 5% of Discretionary Income for certain borrowers. Current plans charge a minimum of 10% of discretionary income. This means eligible borrowers will see their payments cut in half.
The IDR revisions also include many other tweaks that improve life on IDR:
- New Calculation of Discretionary Income – IDR payments are based on discretionary monthly income, currently set at 150% of the federal poverty level. The new calculation will set discretionary income at 225% of the federal poverty level. This means that more borrowers benefit from payments of $0 per monthand all borrowers will benefit from a lower monthly bill.
- faster forgiveness – Current IDR rules void balances after 20 or 25 years of repayment, depending on the plan. Under the new rules, borrowers with an initial balance of less than $12,000 will be eligible for a forgiveness after ten years.
- Unpaid interest waived – Many borrowers have lower IDR payments than the monthly interest charged by their loan. Most IDR plans eventually add unpaid interest via interest capitalization. On the REPAYE plan, borrowers currently receive a subsidy for half of the unpaid interest. Under the new plan, all unpaid interest for IDR borrowers is waived.
Who qualifies for the 5% Discretionary Income Payments?
Unfortunately, the new payment calculation only helps some borrowers.
Any undergraduate student debt is eligible for the 5% Discretionary Income payment. Graduate debt must still be repaid based on a 10% Discretionary Income calculation.
Borrowers who have both undergraduate and graduate debt will pay on a weighted average – if you have mostly graduate loans, you’ll be closer to 10%, and if you have mostly undergraduate debt , you will be closer to 5%.
This proposed new rule merits further consideration.
Treating Graduate Debt Differently Than Undergraduate Student Debt
On the face of it, it seems perfectly reasonable to charge indebted borrowers more.
Graduate borrowing limits are much higher, so graduates often have larger balances. In addition, higher education often leads to lucrative jobs. The proposed rule means doctors and lawyers pay more than community college graduates.
In theory, drawing the line between graduate debt and undergraduate student debt seems fair.
In practice, this line hurts many professionals who do not earn a lawyer’s or doctor’s salary. At the top of the list would be teachers and social workers – professionals who are often required to obtain a master’s degree.
An example of unfair calculations
To see how the different treatment of graduate and undergraduate debt leads to poor outcomes, let’s examine a hypothesis:
- Adam has a four-year degree in economics. Adam got help from his parents to pay for his education and borrowed a total of $20,000 to pay for his education. He works as a banker. Since his debt was all undergraduate, he is entitled to 5% discretionary income payments.
- Bob is a teacher. Bob worked while in college and became a rare graduate without any federal loans. However, since Bob needed a master’s degree to teach, he borrowed $20,000 to pay for his master’s degree program. Bob’s monthly student loan bill will be based on 10% discretionary income payments.
Should Bob pay double Adam’s rate? If they had the same income, the teacher would pay twice as much as the banker.
By distinguishing between graduate debt and undergraduate debt, we create a system in which bankers and computer programmers get better terms than teachers and social workers.
A better way to target IDR relief
It is reasonable that the government would want to reduce IDR payments for borrowers with smaller balances or lower incomes.
If that is the goal, there are better ways to achieve it.
If the government wants to ensure that high earners pay a higher rate, it can do that. They could charge 0% on income up to 225% of the federal poverty level, charge 5% on income between 225% and 500%, and 10% on remaining income.
This approach would mean that well-paid doctors and lawyers still pay a higher percentage of their income, but teachers and social workers keep a larger share of their income.
Similarly, if the goal is to make borrowers with larger balances pay more, the government could do that as well. They could charge 5% discretionary income on balances up to $50,000 and 10% on remaining debt.
Change the rules
The good news for those who find the proposed rules unfair is that there is still a chance that changes will be made.
The public comment period on the new rules is now open. Anyone with ideas to share can leave a comment to the Ministry of Education. The deadline for comments is February 10, 2023.
If enough people speak up, the final version of the new IDR plan could be improved.