How much would the latest student loan plan from Biden cost? New study offers answers

Susan Walsh/AP

The fight for student loan relief continues, and the price could be hefty.

As President Joe Biden’s plan for debt forgiveness — which was originally announced in August — remains tangled in legal limbo, the Department of Education announced more details about another plan to save borrowers in January.

The proposed regulations would revise an existing income-driven repayment plan, determining monthly payments by a borrower’s income, the department said.

Now, a study from the University of Pennsylvania’s Wharton School says those revisions could cost the United States between $333 billion and $361 billion over the next 10 years — significantly higher than the administration’s $138 billion estimate.

The administration’s estimate applies under “strict ‘static’ assumptions,” failing to account for potential increases in the number of borrowers who choose income-driven repayment plans, according to the study. Instead, Wharton researchers argue that the new regulations would encourage more borrowers to join the plans.

Other experts have argued that the regulations might even encourage borrowers who would not otherwise take out loans to borrow because of the plan.

The department said its proposal is responsible and will benefit low- and middle-income borrowers, according to a statement sent to McClatchy News.

“The plan would cut monthly payments in half for undergraduate borrowers from low- and middle-income families all while the Biden-Harris Administration is reducing the deficit at record levels,” a spokesperson said in the statement.

New regulations could save borrowers thousands

The proposed regulations could save borrowers thousands in student loan payments, officials say.

Under the recently announced guidelines, single borrowers earning less than $30,600 per year and a borrower in a household of four with an annual income of less than $62,400 would have a $0 monthly payment on their student loans, according to the department.

All other borrowers who have undergraduate loans and enroll in the program would see their payments cut in half.

Under the existing plan, borrowers have the opportunity to follow monthly payments that are equal to 10% of their discretionary income divided by 12.

The new regulations would change the definition of discretionary income. Currently, discretionary income is considered any income “in excess of a protected amount set at 150 percent of the Federal poverty guidelines.”

The proposed regulations change this standard, instead considering protected income to be 225% of the federal poverty guidelines.

The plan also stops the accumulation of interest payments, preventing a borrower’s balance from growing as they make payments.

The proposed rules also aim to help borrowers make quicker progress toward forgiveness, providing provisions specifically for borrowers with smaller balances.

Under the existing REPAYE plan, borrowers receive forgiveness after 20 or 25 years of payment dependent on the type of loan, regardless of their balance. According to the department, this might inhibit borrowers with small balances, especially community college borrowers, from enrolling in income-driven plans.

Now, the department wants to shorten the time frame for forgiveness for borrowers who took out $12,000 or less in student loans.

Instead of 20 years, the new proposal would grant these borrowers forgiveness after “making the equivalent of 10 years of payments,” according to a department fact sheet.

The new regulations come as Biden’s student loan forgiveness plan remains blocked by courts and awaits the Supreme Court’s review. The Department of Education stopped accepting new applications for relief in November, and the administration extended its payment moratorium through June.

More borrowers means a heftier price tag

Because the regulations offer such direct financial benefits, researchers believe that the department’s static 33% take-up rate is a big underestimate and instead suggests that somewhere between 70.3% to 74.5% of borrowers are likely to turn to an income-driven repayment plan.

The study also suggests that the simplicity and convenience of the repayment plans could drive borrowers to select the plans. Researchers give three main reasons for this:

  1. An easier application and recertification: A separate study from 2022 found that simplifying the income-driven repayment plan application could drive up enrollment by 2.3 times. The automation of income recertification could also increase enrollment rates.

  2. Ending interest accumulation: The study argues that without interest accumulation, borrowers will face less confusion and frustration, encouraging them to enroll in an income-driven repayment plan.

  3. Automatic enrollment for delinquent borrowers: Under the proposed regulations, people who are at least 75 days late on their payments will automatically be enrolled in the income-driven repayment plan, and default borrowers will have access to the plan. Other research has shown that this could drive enrollment up.

The study’s findings, however, are not based on actual borrower behavior but instead are modeled from predictions. Though these are possibilities, borrower behavior is uncertain, so no outcome is guaranteed yet.

What happens next?

The regulations are not finalized yet.

The department said it submitted the full list of proposals to the Federal Register on Wednesday, Jan. 11, which began a 30-day public comment period.

After public comments are accepted, the department will review the public’s input before finalizing the rules later this year. It said it aims to start implementing provisions before the end of 2023.

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