On August 24, 2022, the Biden Administration announced the cancellation of $10,000 in federal student loan debt ($20,000 if you went to college on Pell Grants) for those earning less than $125,000 per year. In addition, the government put student loan payments on pause until 2023.
While these government actions grabbed the headlines, a sleeper detail buried in President Biden's loan cancellation plan could put more money in your pocket. Assuming you still have a balance after the $10,000 or $20,000 cancellation, entering the government's new repayment plan could save you hundreds each month after your payments resume.
The Department of Education's new income-driven repayment plan caps monthly payments on undergraduate debt to 5% of your discretionary income. This limit is down from 10% or 15% under existing plans and will substantially reduce monthly payments for lower- and middle-income borrowers.
Payments for federal graduate loans will be capped at 10%. Borrowers with both undergraduate and graduate loans must pay a weighted average rate.
The plan also raises the amount of money considered non-discretionary income. "Non-discretionary" income isn't used in calculating how much you can afford to pay in monthly student loan payments.
For existing plans, the threshold that's shielded when calculating loan repayments is 150% of the federal poverty level, which is $20,385 for a single person in 2022. Under the new plan, the Department of Education is raising how much money borrowers can keep to 225% of the poverty level, or $30,577 per year for a single person.
Also, the plan ensures any borrowers making about the equivalent of a $15 hourly minimum wage or less won't have to make payments.
In addition, this new repayment plan covers any accrued unpaid interest. So, the amount you owe won't grow if you make a qualifying payment, which could be $0 for those with low income.
Under current plans, your payment might not cover the monthly interest on your loans. Then, the unpaid interest gets capitalized and added to the loan balance, making your debt larger.
Getting rid of accruing unpaid interest means that your balance won't increase as long you stay current with your monthly payments.
Under this plan, the loan balance is forgiven after ten years of payments, instead of the usual 20 years, for borrowers with original loan balances of $12,000 or less.
Before this repayment plan is available, a draft rule must be published in the Federal Register. Then, it's open for public comments for 30 days. So, exactly when the plan could become available is unclear. But it will most likely open by the summer of 2023.
To get updates about this new income-driven repayment plan and when it will start, sign up to receive emails on the Department of Education subscription page.
Effective date: August 24, 2022