Student loan repayment plan: Proposed changes

Close up image of a tabletop with loan documents, a laptop and a person's hand using the calculator on their cellphone.Image: Close up image of a tabletop with loan documents, a laptop and a person's hand using the calculator on their cellphone.
Editorial Note: Credit Karma receives compensation from third-party advertisers, but that doesn’t affect our editors’ opinions. Our third-party advertisers don’t review, approve or endorse our editorial content. It’s accurate to the best of our knowledge when posted.

Some federal student loan borrowers would see lower monthly payments — and others wouldn’t need to make any payments at all — under a new plan proposed by the Biden administration this month.

The proposal aims to update the Revised Pay As You Earn (REPAYE) program. REPAYE is one of four income-driven plans offered by the Department of Education to help people who are struggling to repay students loans. The agency expects to finalize the rules later this year.

Key takeaway: With a pause on student loan payments set to expire this summer, the REPAYE changes could cut some borrowers’ monthly payments in half while eliminating them altogether for others.

What’s in the REPAYE plan?

More than 9 million borrowers are paying back over $500 billion through income-driven repayment plans. With a revised REPAYE plan, people with undergraduate loans would get the biggest reductions.

  • Payments would fall for some. Payments on undergraduate loans would be capped at 5% of a borrower’s discretionary income — down from the current cap of 10% in the REPAYE plan. For graduate debt, borrowers would pay 10% of discretionary income. The payment for borrowers with both undergraduate and graduate debt would be a weighted average.
  • More income would be protected. Borrowers earning less than 225% of the poverty guideline — about $15 an hour — would not have to make payments. In the current program, discretionary income is defined as anything above 150% of the poverty guideline.
  • Less interest for some. If a borrower’s payment isn’t big enough to cover interest charges that month, the remaining interest would not be added to the total.
  • Shorter loan forgiveness terms. Borrowers with original undergraduate student loan balances of $12,000 or less would get their loans forgiven after just 10 years of making monthly payments — rather than the current repayment period of 20 years. Each additional $1,000 borrowed above $12,000 would add one year of payments before eligibility for forgiveness. The prevailing caps of 20 years (for borrowers with only undergraduate loans) or 25 years (for those with graduate loans) would apply.

Who would qualify under the REPAYE proposal?

Both current and future borrowers would be covered under the plan. And the plan would continue to allow borrowers to qualify for Public Service Loan Forgiveness.

  • Current students — All student borrowers with direct federal loans would be eligible for REPAYE repayment plans. Undergraduate borrowers qualify for lower payments than graduate borrowers.
  • Defaulted borrowers — Borrowers who are in default, which means payments haven’t been made as outlined in the loan contract, are typically ineligible for income-driven repayment plans. But the new proposal would allow those who’ve fallen behind on their payments to sign up. Borrowers who are at least 75 days behind on their payments would be automatically enrolled into a plan.

Note that parents who borrowed money using Parent PLUS loans would not be eligible to enroll.

What you can do about repaying your student loans

Defaulting on your student loans can hurt your credit. If you’re having trouble paying them, here are some steps to consider.

  • Contact your loan servicer. Your loan servicer can discuss options with you and help you stay in good standing with your loans.
  • Change your repayment plan. Besides the income-driven repayment plans offered by the Department of Education, you can sign up for a standard repayment plan with a fixed monthly payment, a graduated repayment plan that begins your payments with a lower amount that gradually increases, or an extended payment plan that lets you choose — your payments either can be fixed or graduated.
  • Consolidate. Federal student loan holders can apply for a direct consolidation loan, which combines your student loans into one from a single lender and one monthly payment.
  • Get a deferment or forbearance. Under certain circumstances, you may be able to defer your federal loans for up to three years. If you don’t qualify, you may be eligible for forbearance, which can postpone or reduce your payments for up to 12 months.

About the author: Brad Hanson is a senior editor at Credit Karma. His 30 years of experience in print and digital media includes work for the Los Angeles Times-Washington Post News Service, Trucks.com and Polyvore. Most recently before… Read more.