‘Fixing’ the federal student loan system: What's the plan?

Proposed changes to student loan program would create a new income-driven repayment plan

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Student loan update: President Biden proposes significant changes to the federal student loan program, including a new income-driven repayment plan. (Shutterstock)

The broad student loan forgiveness President Joe Biden announced on Aug. 24 is just one part of the administration’s plan to deal with ballooning student loan debt. The plan also includes a proposal for a new income-driven repayment plan that — if implemented — would cut borrowers’ monthly payments in half.

Here’s what you need to know about student loan relief opportunities currently available, and additional relief that could become available.

It’s important to note that the student loan debt relief plan doesn’t apply to private student loans. However, refinancing can be a way to get a lower interest rate and reduce the overall cost of your student loans. Credible makes it easy to compare student loan refinance rates from multiple lenders in minutes.

Overview of Biden’s student loan debt relief plan

The administration’s plan has three key components as announced on Aug. 24:

  • Extend the federal student loan payment pause until Dec. 31, 2022.
  • Provide up to $10,000 in student loan forgiveness to borrowers with annual income of less than $125,000 ($250,000 for households). Qualifying borrowers who received Pell Grants will be eligible for up to $20,000 in forgiveness.
  • Create a new income-driven repayment plan that will make significant changes to how borrowers repay their loans and will make it easier for them to secure forgiveness.


How will the plan affect federal student loan payments?

If implemented, the administration’s proposal for a new income-driven repayment plan would:

  • Slash the cap on IDR plan payments in half — Current IDR plans cap borrower payments at 10% of their discretionary income on undergraduate loans. Biden’s proposal would lower that cap to 5%.
  • Increase the amount of income protected from repayment — Currently, IDR plans are based on your discretionary income — which is defined as the difference between your annual income and 150% of the poverty guideline for your household size and where you live. Biden’s proposal would boost that threshold to 225%.
  • Mitigate the ballooning effect of capitalization — Borrowers paying on current IDR plans have their unpaid interest added to their loan principal — a process called capitalization. This is how borrowers who start out with a few thousand dollars of student loans can end up still owing far more than their initial loan amount after making IDR plan payments for years. Under Biden’s plan, the federal government would cover a borrower’s unpaid monthly interest, so that their balance won’t continue to grow while they make payments on an IDR plan.


How will the plan affect student loan forgiveness?

Previously, people with federal student loans had two routes to loan forgiveness. They could either work for a qualifying employer in a public service role for a set number of years, or they could complete their repayment term on an income-driven repayment schedule and have their remaining loan balance forgiven.

The Department of Education has already taken multiple steps to make it easier for borrowers to qualify for its Public Service Loan Forgiveness Program. Biden’s proposal addresses the length of time it takes to achieve forgiveness on an IDR plan.

Currently, borrowers must pay 20 to 25 years on an IDR plan (depending on the type of plan) before they can qualify to have their remaining balance forgiven. Biden’s proposal would set that limit to just 10 years for borrowers with balances of $12,000 or less.

How to get $10K to $20K of federal student loan forgiveness

If you think you qualify for the broad student loan forgiveness announced last week, your first step should be to log into your financial aid account at StudentAid.gov. Make sure your information — including your income and current address — is up to date.

Although the Department of Education says it already has data for nearly 8 million borrowers, it will launch an application for student loan forgiveness by early October. You can sign up to be notified when the application is available on the Department of Education's subscription page.


Money-saving options if you don’t qualify for forgiveness

If you have private student loans, which are excluded from IDR plans and forgiveness, you’ll need to find another way to lower the cost of your loans. Or, if you have higher-interest Grad PLUS or Parent PLUS Loans and don’t qualify for forgiveness, you may wonder what your alternatives are.

Refinancing can allow you to change the interest rates and payment terms of your student loans. Here’s how it works:

  • If your credit score is good (or has significantly improved since you first took out your loans), you may be able to qualify for a lower interest rate. A lower interest rate can reduce the overall cost of your loans.
  • Refinancing into a shorter repayment period will also reduce your overall interest costs and allow you to get out of debt faster — although your monthly payment will increase.
  • Refinancing into a longer repayment period can lower your monthly payment and make it more manageable. But you’ll pay more interest over the life of the loan.
  • If your original student loan had a cosigner, refinancing can be a way to release your cosigner from their obligation.

Keep in mind that refinancing federal student loans with a private loan means you’ll lose access to federal benefits like income-driven repayment plans and loan forgiveness. Before you decide to refinance, it’s a good idea to compare rates from multiple lenders. With Credible, you can easily see your prequalified student loan refinance rates in minutes.