Debt cancellation got all the attention, but this Biden proposal could impact student-loan borrowers more, critics and advocates say

“I felt that was a bigger story,” Daurio said of the proposed reforms.

Student-loan policy experts — both supporters and detractors of the Biden administration’s debt relief initiative — also believe that the White House’s proposed new income-driven repayment plan, known as IDR, could reshape the student loan system. Officials haven’t released the details of their proposed changes to the government program that allows student-loan borrowers to pay back their debt as a percentage of their income. But if the pieces of the plan officials have already outlined come to fruition, it could radically change the experience of repaying student loans for millions of borrowers.

Senator Elizabeth Warren, a Democrat of Massachusetts, called the plan “potentially transformative,” in a September speech to student-loan borrower advocates. 

“This is not just about can we get the president to do a one time cancellation,” Warren said. “This is about how we reform how we think about paying for post-high school education.” 

Income-driven repayment is a decades-old feature of the student loan system, but in August, the Biden administration pitched a new version of the repayment scheme. The government first offered the payment scheme as an option on some federal student loans in the early 1990s in order to create a safety net for borrowers who, because they graduated in a recession or faced an unexpected or temporary crisis, couldn’t afford to repay their debt in a standard mortgage-style plan. The idea was to grant an alternative to fixed monthly payments that are based on loan size. Under the current income-driven repayment plans, borrowers pay back their loans as a percentage of their income and then have the remaining balance canceled after 20 or 25 years. 

In the decades since policymakers developed the program, they’ve added more versions of the plan, typically in an effort to make it more generous, and a growing share of borrowers — 47%, according to a 2022 report from the Government Accountability Office — pay back their loans as a percentage of income, indicating that IDR has become less of an insurance policy and more of a typical way borrowers manage their debt amid rising college costs and slow wage growth. 

Still, borrowers and advocates have complained that the program doesn’t adequately address borrowers’ challenges repaying their debt because they can face obstacles getting into and staying on the plans, the payments can still be too expensive because too little of the borrower’s income is protected, and borrowers’ whose payments only cover some of the interest watch their balances grow and grow.

Without the final language, it’s hard to say exactly how far the Biden Administration’s proposed changes to income-driven repayment will go in addressing advocates’ concerns. But based on details released in press materials, they’re hopeful that it could provide a fix to some of the biggest challenges borrowers using IDR face. 

If implemented, the plan could be “super helpful” psychologically to borrowers by mitigating some of the “the distress, the things that also weigh on people’s decisions in their everyday lives,” said Daniel A. Collier, an assistant professor at the University of Memphis who studies income-driven repayment.

Meanwhile, the proposal is also likely to provide fuel for critics who have charged that income-driven repayment is too costly to taxpayers.

‘A long way towards solving one of the big problems’

The full details remain elusive, but this is what borrowers know so far. According to an outline of the plan the Biden administration released along with the debt cancellation announcement in August, those with only undergraduate loans would be able to pay 5% of their discretionary income monthly — down from a minimum of 10% in today’s IDR plans — and remain current on their loans. If these borrowers have a balance of $12,000 or less, the time they’ll spend repaying their debt will be capped at 10 years, down from 20 or 25 years under previous iterations of income-driven repayment. 

The amount of income that would be protected from student loan payments under the Biden administration proposal would rise from 150% of the poverty line to 225%. That means a single person earning roughly $15 an hour could pay $0 a month and remain current on their loans. 

In addition, the government will cover the unpaid interest that accrues each month while borrowers are on these plans. That change, if it comes to fruition, could transform the experience of borrowers paying student loans as a percentage of income. 

It’s not uncommon for these borrowers to experience what’s known as negative amortization, where instead of a loan balance shrinking — even while making payments — it actually grows. In 2019, more than 25% of borrowers between the ages of 18 and 35 had a larger student loan balance than in 2009, according to an analysis by economist Marshall Steinbaum and published by the Jain Institute. In 2019, 10% of borrowers had student loan balances nearly four times as high as what they were in 2009, Steinbaum found. 

“It will go a long way towards solving one of the big problems, which is that if people are doing what the Department [of Education] is asking them to do and making payments every month, not seeing their balances grow over time is really, really important,” Sarah Sattelmeyer, project director, Education Opportunity and Mobility at New America, a think tank, said of the proposed reforms. 

That’s an experience Daurio knows firsthand. “I think I accrued a couple thousand dollars in two years between undergrad and grad school and I was paying every month on that,” Daurio said.  “It just felt overwhelming before, now it feels a lot more manageable.” 

It’s unclear whether the government will cover unpaid interest for borrowers like Daurio who have loans from both undergraduate and graduate school. The fact sheet released by the White House in August didn’t specify whether the benefit applied only to undergraduate loans and the Department of Education didn’t immediately provide comment to clarify. 

But if it does, borrowers with debt from graduate school stand to receive “a large benefit,” said Jason Delisle, a senior policy fellow at the Urban Institute, a think tank. 

Delisle has criticized the combination of allowing students to borrow up to the cost of attendance for graduate school and providing them with access to income-driven repayment, saying it drives up the cost of the student loan program because borrowers with debt from graduate school tend to have higher balances that could ultimately be forgiven under an income-driven repayment plan. He also worries that it could push up the cost of graduate education because universities know students have the capacity to pay higher tuition through borrowing and repaying the debt through relatively generous plans. 

Covering the unpaid interest for borrowers with loans from graduate school would exacerbate this problem, Delisle said, and provide them with a bigger benefit than borrowers with loans only from undergraduate college because their balances are likely to be higher. The same is true if the more generous income protection also applies to borrowers with loans from graduate school, Delisle said. 

“It makes what I would describe as the problems in the graduate school space worse,” Delisle said. “Directionally there’s more loan forgiveness now.” 

But to some student loan borrower advocates, distinguishing between undergraduate and graduate borrowers — a scheme already in place in some of the current versions of income-driven repayment and which the new proposal replicates in some provisions — undermines the philosophical underpinning of the repayment plan. 

If the idea is to keep student loans affordable for borrowers and the government determines what’s affordable based on income, “it doesn’t really make logical sense,” that you would make a distinction between how much a borrower has to pay based on their degree, said Persis Yu, deputy executive director at the Student Borrower Protection Center.    

“They don’t have more resources to pay that money just because they have a degree,” she said. 

Yu, who called the distinction, “frankly just terrible,” also worries that it could disproportionately harm Black borrowers and particularly Black women. Due to labor market discrimination, Black women often need more education to compete in the job market, but those same forces mean they’re not compensated the same for earning those degrees as their white and male counterparts. Black women with advanced degrees were paid nearly $7 less than white men with only a bachelor’s degree in 2020, according to data from the Economic Policy Institute, a worker-focused think tank. 

These women are also more likely to borrow to attend college and tend to borrow more due to historical policies that have blocked Black households’ ability to build wealth. “The fact that we know that white men can make the same income with just a bachelor’s degree punctuates how unfair that distinction is,” Yu said of the provisions of the proposal limited to undergraduate borrowers. “That’s still a really problematic component of this plan.” 

The plan, if implemented, will likely make attempting college or earning credentials at the other end of the educational spectrum less risky. It’s often borrowers with relatively small loan balances who struggle to repay their debt. That’s largely because the low balance is a sign that either they earned a short-term credential that isn’t worth a lot in the labor market or they left school before they were able to finish their degree, student loan experts say.  

By capping the payments of borrowers with loans from an undergraduate college at 5% of their monthly income and putting a 10-year limit on the time relatively low balances — $12,000 or less — will pay on their loans, the proposal aims to get at some of these challenges. 

“The idea that going forward we’re going to have in effect a federal government that says to everyone in this country ‘you want more education we’ll go into partnership with you, the American people will be your partners,’” Sen. Warren told the room full of advocates in September. “If when you leave school, you have debt and you make just a little bit of money, then you only pay back a little bit, and if you make a lot of money you pay back a whole lot.”

Community college won’t be free, but it could be less risky

For months, the Biden administration has been looking to target relief for community college students. One of the first planks to drop from the now-defunct Build Back Better, the Democrats’ social spending plan, was a provision that would have made community college free. The new reforms to repayment appear to be taking another stab at helping this group. “Borrowers whose original balance was less than $12,000, many of whom are community college students, will be done paying just after 10 years,” Biden said in announcing the plan. 

The new repayment plan won’t make two years of community college free as lawmakers had proposed under Build Back Better. This is partly because it requires that students borrow up front and earn below a certain threshold in order to keep loan payments minimal for the 10 years leading up to when they qualify for debt relief. They’ll also need to continue to keep on top of the paperwork necessary to stay enrolled in the plan.  

“We don’t look at IDR reforms as a path to free college,” said Maxwell Lubin, chief executive officer of Rise, a student advocacy organization, because “obviously, it still requires the debt-based system in order to work.” 

In addition, the $12,000 balance is less than the average $16,800 of federal student debt owed by students who received an associate’s degree at a community college during the 2017 to 2018 academic year.

Though it doesn’t make community college free, the new IDR plan acknowledges that some students have to borrow to attend community college — the cheapest college option available — and could help minimize the risk for students who invest in a credential below a bachelor’s degree, said Julie Peller, the founder and executive director of Higher Learning Advocates, an advocacy group focused on today’s college students. That’s particularly likely to be the case for those who earn certificates needed to work in medical assisting, cosmetology and other careers. Borrowers who study at public schools like community colleges for these credentials had an average of $13,700 in debt.

Demographically, women borrowers, borrowers who are Black and Hispanic and middle-class borrowers, are those who are most likely to benefit from reforming income-driven repayment because they’re overrepresented among borrowers using these payment plans, according to research by Collier and co-authors. 

“It literally would be a middle class policy, but also one that will help women and likely minority borrowers the most,” Collier said. “We need to keep that in mind and actually craft policy around those individuals, not accidentally stumble into it,” he added, noting that the proposal appears to be targeting relief by income and not by other demographic factors. 

Student-debt holders are still at least several months away from the proposed repayment plan announced in August becoming a reality. In order for that to come to fruition, the Biden administration needs to publish a notice of proposed rulemaking, essentially an invitation for stakeholders to submit comments. Under a normal schedule, if officials publish this notice by November, then the repayment plan should be available by July 1, 2023. The Department has said it doesn’t think it will meet the November deadline, but the agency has indicated that it plans to implement the rule by July. 

Student loan payments are slated to resume at the start of the year. If that timeline holds, then there would still be about six months in between when borrowers start repaying their loans and the new income-driven plan is available. 

For the policy to ever benefit anyone, its implementation needs to go smoothly. The government and the contractors it hires to manage the student loan program have historically struggled with such tasks.  

A report published by the Government Accountability Office earlier this year found that the Department of Education and servicers weren’t doing enough to ensure that borrowers in income-driven repayment plans who were eligible for forgiveness received the relief slated for them. The GAO found that the agency had approved IDR-related discharges for just 157 loans and that 11% or 7,700 of the loans the watchdog reviewed were potentially eligible for relief. The Department announced a program in April aimed at helping more borrowers access forgiveness under income-driven repayment and ensuring servicers count borrowers payments towards discharge accurately.

In addition, borrowers have historically struggled to get into and stay in income-driven repayment plans. Earlier this year, Navient settled with a group of state attorneys general over claims the company steered struggling borrowers towards forbearance — which pauses loan payments, but can drive up the cost of a loan long-term — instead of income-driven repayment, which requires more steps to enroll in, but provides forgiveness at the end of decades of payments. Navient’s chief legal officer called the attorneys general’s claims “unfounded” when the deal was announced. 

Scott Buchanan, the executive director of the Student Loan Servicing Alliance, said the challenges borrowers face in income-driven repayment have to do with requirements to prove and annually certify income, obstacles this plan doesn’t seem to address. 

“The work that borrowers have to do to take advantage of these plans, I’m not sure any of that is going to change,” he said. 

Whether borrowers take the government up on its offer of more generous repayment terms will be based in part on how well the government, nonprofits and colleges advertise the program, Lubin said. He’s concerned about a gap in information and outreach on these types of programs coming from higher education institutions and philanthropy. His organization is launching a campaign in October to help raise awareness of the Biden administration’s broad debt relief plan as well as other initiatives, including the proposed changes to income driven repayment. 

“The IDR proposal is one of the most important parts of what was announced by President Biden, but has received the least attention and as a result much more work is needed to make sure that borrowers can take advantage,” he said. “It’s the Education Department’s and administration’s job to communicate to borrowers, we need to see much more from them in terms of how they’re going to use all of their assets to ensure that people know about this.” 

If the rollout of this program turns out similarly to how Public Service Loan Forgiveness was initially managed — with roughly 99% of applicants to the program getting rejected in its first years — “then this policy will be a really good press release that never fully materialized into its ability to help people,” Lubin said.