The ‘Sleeper-Hit' Beyond $10K: Student Loan Borrowers Say New Income-Driven Repayment Plan Could Be ‘Life-Changing'

The day the Biden administration unveiled its highly anticipated student loan forgiveness plan was a "celebratory day" for Justin Short.

Short, 34, graduated from the University of Missouri in 2012 with a degree in hospitality management, $47,000 in federal student loans and $5,800 in private student loans. Like many borrowers, his college debt has plagued his personal and financial decisions for years.

So while he found relief in many of the announcements coming from the White House on Aug. 24 — $10,000 in debt forgiveness, another payment pause extension through the end of the year — Short was most interested in the announcement of proposed changes to income-driven repayment plans.

The Department of Education's new plan would cap monthly payments on undergraduate debt to 5% of discretionary income, down from the usual 10% to 15% on existing plans.

The proposal also raises the amount of money considered non-discretionary income and shielded from being used to calculate student loan payments.

It would cover any accrued unpaid interest so that no borrower's balance would grow if they made a qualifying payment.

And it would forgive loan balances after 10 years of payments, instead of the usual 20, for those with original loan balances of $12,000 or less

This "sleeper" detail of the loan forgiveness plan could be "a game-changer" for millions of borrowers with remaining balances, says Julie Peller, executive director at Higher Learning Advocates, a bipartisan higher education nonprofit.

"I wish people were talking about this more than the $10,000 piece," Short says, "because this will put more money into the pockets of everyday, middle-class Americans who need that extra help, especially when student loan payments resume on Jan. 1."

"This has huge implications," he adds.

From $690 to $200 a month: New income caps could be 'life-changing'

Short was about to begin making payments on his federal student loans, which were in forbearance, in early 2020. At the time, he was making pretty good money working in the hotel industry, but putting even 10% of his discretionary income — $690 — toward student debt each month would require sacrifice, he says.

"The payment plan at 10% is a lot of money," he says — much more than he thought when he was 18 and taking out those loans. He wondered: "What am I going to do now to afford my student loan payments? Would I have to sell my car or move in with family? I was already in the smallest apartment I could get in Kansas City."

Then Covid hit and Short was laid off from his job. He's since found new work as an assistant property manager, earning less than what he used to make, and has been taking advantage of the student loan moratorium. But the thought of resuming payments at 10% of his income by January 2023 was a burden.

Under the newly proposed income-driven plan, Short says the 5% income cap will be "life-changing," and notes that he'll benefit from the increased threshold for non-discretionary income.

For existing plans, the threshold that's shielded from being used for loan repayments is 150% of the poverty level, or $20,385 for a single person in 2022. Under the new plan, the Department of Education would raise the amount of money borrowers can keep to 225% of the poverty level, or $30,577 per year for a single person.

This also ensures any borrowers making the equivalent of a $15 hourly minimum wage or less won't have to make any payments on their loans under the plan.

The increased threshold for non-discretionary income is "a big recognition that people have many other things on their plate," Peller says, like rising costs for food, housing, child care and other essential needs.

Under the new payment plan, Short expects to pay around $200 per month on his federal loans, a "much more manageable amount, and not an 'I'm moving back in with my parents' situation," he says.

"It is a good step in recognizing that borrowers over the past decade needed some assistance, and getting that assistance will have a positive impact for people's financial future over several decades," he adds.

Unpaid interest will no longer lead to ballooning debt

Another major impact of the proposed payment plan is that borrowers will no longer accrue interest on their loan as long as they make their qualified monthly payment, which could be $0 for those with low income.

That's "a really big deal" for low-income borrowers, Peller says: Currently, if a borrower's income is low enough, their payment may not cover the monthly interest on their loans. If that's the case, then the remaining unpaid interest gets capitalized and added to the loan principle. This "essentially balloons the payments and puts people in a cycle of never being able to make forward progress on their student loans," Peller says.

Getting rid of accruing unpaid interest means that "unlike other existing income-driven repayment plans, no borrower's loan balance will grow as long as they make their monthly payments," the White House said.

Eliminating unpaid interest could help Christian Blair, 29, an attorney in Houston. He graduated from law school at the University of Kansas in 2018 with roughly $170,000 in federal student loans, though some of that also came from his undergrad years.

Since taking out those loans, though, unpaid interest has tacked on another $30,000 to his principle.

Under the new proposal, payments for undergraduate loans will be capped at 5% of discretionary income, graduate loans will be capped at 10%, and borrowers with a mix of both will pay a weighted average rate.

Blair has been taking advantage of the student loan moratorium during Covid, otherwise payments on his current plan would be nearly $2,500 a month. With a new cap and higher threshold for non-discretionary income, he expects payments under the new income-driven plan would be much lower.

"If I make qualifying payments and my balance doesn't keep going up, and those payments are less than 10% of my discretionary income — that's a better deal than most private offerings, particularly because of the interest that would accrue," Blair says.

"I was going to refinance, but not anymore," he adds. "And I think that should be the case. I shouldn't have to go through a private solution to get a better loan than I can get through the government."

What happens next

The draft rule for the income-driven repayment proposal will be published on the Federal Register in the coming days and open to public comment for 30 days afterward. A Department of Education spokesperson said it could not comment on the timing of plan availability, though experts like Peller say it could open up by summer 2023.

A few big questions remain: Who will be eligible for the program, which types of loans qualify and how will people enroll?

"In the past, income-driven repayment options are really good, but require a lot of care and attention by the borrower, with requirements to recertify their income every year and make sure they're getting their information in on time to servicers," Peller says.

"It's going to require a good amount of clear communication to people so they don't feel they're expecting something they're not eligible for, and more importantly, so they don't miss something they are eligible for," she adds.

Though Blair will have to wait to see how the income-driven repayment proposal shakes out, he says Biden's forgiveness plan has already made an impact on his family.

After discussing the news with his parents last week, Blair learned his father, who is 55, carries student debt from earning an associate's degree and has been making $60 minimum payments every month for nearly 20 years.

His remaining balance falls under $10,000, and he'll qualify for it to be wiped clean under the new plan, Blair says.

"He's the target audience for a lot of this stuff," Blair adds: A Black man "who got an associate's degree, couldn't afford to pay out of pocket and has been paying for it my entire life, basically, and helped put me through school all the while. For the first time since he can remember, as an adult, he won't have student loans."

Check out:

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How to check if you qualify for Biden's new student loan forgiveness plan

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