President Biden speaks about student loan debt forgiveness on Aug. 24, 2022, in the White House’s Roosevelt Room. Education Secretary Miguel Cardona listens at right. If it’s finalized, the proposal would have lower monthly payments, an easier path to forgiveness and a promise that unpaid interest will not be added to a borrower’s loan balance. Evan Vucci/Associated Press file
WASHINGTON — The White House is moving forward with a proposal that would lower student debt payments for millions of Americans now and in the future, offering a new route to repay federal loans under far more generous terms.
President Biden announced the repayment plan in August, but it was overshadowed by his sweeping plan to slash or eliminate student debt for 40 million Americans. Despite the low profile of the payment plan, however, some education experts see it as a more powerful tool to make college affordable, especially for those with lower incomes.
Education Department officials on Tuesday called the new plan a “student loan safety net” that will prevent borrowers from getting overloaded with debt.
“Student debt has become a dream killer,” Education Secretary Miguel Cardona said. “This is a promise to the American people that, at long last, we will fix a broken system and make student loans affordable.”
Biden, a Democrat, is moving forward with the repayment plan even as his one-time debt cancellation faces an uncertain fate before the Supreme Court. The White House has asked the court to uphold the plan and reject two legal challenges from conservative opponents. The Biden administration submitted its brief last week, with oral arguments slated for Feb. 28.
The Education Department formally proposed the new repayment plan on Tuesday by publishing it in the Federal Register, starting a public comment period that often takes months to navigate.
If it’s finalized, the proposal would give a major overhaul to income-driven repayment plans – one of several payment options offered by the federal government. The resulting plan would have lower monthly payments, an easier path to forgiveness and a promise that unpaid interest will not be added to a borrower’s loan balance.
The federal government now offers four types of income-driven plans, but the proposal would mostly phase out three of them while focusing on one simplified option, scaling back the confusing array of options borrowers now face.
Under existing plans, monthly payments are capped at 10% of a borrower’s discretionary income, and those earning less than $20,400 a year aren’t required to make payments. The new proposal would cap payments for undergraduate loans at 5% of borrowers’ discretionary pay, cutting their bills in half, and require payments only for those who earn more than about $30,000 a year.
As long as borrowers make their monthly payments, any unpaid interest would not be charged. The change is meant to prevent borrowers from having unpaid interest added to their loan balance, a practice that can cause debt to snowball even as borrowers make payments.
Significantly, the proposal would also make it easier to get debt erased after making several years of payments. Existing plans promise to cancel any remaining debt after 20 or 25 years of payments. The new plan would erase all remaining debt after 10 years for those who took out $12,000 or less in loans. For every $1,000 borrowed beyond that, a year would be added.
Typical graduates of a four-year university would save about $2,000 a year compared with today’s plans, the Biden administration says, while 85% of community college borrowers would be debt-free within 10 years.
Supporters see the proposal as a significant stride toward college affordability. Some say it’s so generous that it approaches free community college – a campaign promise that Biden has pushed but failed to deliver.
The Institute for College Access and Success, a nonprofit organization that promotes college affordability, praised the proposal as a significant improvement over existing plans.
“The changes proposed today would provide meaningful financial relief to millions of borrowers and help shield students from debt that has not paid off, including those who start college but do not complete a degree,” said Sameer Gadkaree, the group’s president.
Opponents on the right blast the revamped plan as an unfair handout with a steep price tag. The Biden administration estimates the repayment plan would cost nearly $138 billion over the decade, and some critics have put it closer to $200 billion.
Republican Rep. Virginia Foxx, chairwoman of the House Committee on Education and the Workforce, said the proposal turns the federal loan program into “an untargeted grant with complete disregard for the taxpayers that fund it.”
“Because President Biden couldn’t get his radical free college agenda through Congress, he has resorted to doing it through the backdoor by executive fiat,” Foxx said in a statement.
Even some on the left have questioned the prudence of the idea, saying it’s so generous that it effectively turns student loans into grants that don’t need to be repaid. That could lead more students to borrow, they warn, and it could spur colleges to raise tuition prices if they know students won’t be on the hook.
Still others have urged the administration to abandon income-driven payment plans entirely, calling them a failed policy. Critics cite a federal report from last year finding that sloppy oversight of the program left thousands of borrowers stuck with debt that should have been forgiven.
Cardona said his agency is working on other proposals that would hold colleges accountable if their students get overburdened with debt. One idea promoted by Biden is to warn the public about programs that leave graduates saddled with debt.
The Education Department on Tuesday began the process to deliver that goal, asking the public about the best way to identify “low-value” programs.
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