Payment reforms can help student borrowers for years

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New income-focused student loan repayment plan could positively impact borrowers’ finances for decades

Much of the public attention on President Joe Biden’s loan forgiveness plan has focused on two things: extending the federal student loan payment pause through the end of the year and loan forgiveness of $10,000 to individual borrowers who meet certain income requirements.

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But for many borrowers, the biggest long-term impact is an income-tested provision that would permanently lower their monthly payments.

As previously reported by GOBankingRates, the Biden plan includes a U.S. Department of Education proposal that would halve monthly payments for undergraduate loans, increase the amount of income that would be protected from repayment, write off some 10 loan balances years earlier than the current rules allow. , and simplify the sign-up process for certain payment plans.

A White House fact sheet released last month said the Biden administration was “reforming student loan repayment plans so that current and future low- and middle-income borrowers have smaller, more manageable monthly payments.” .

The Ministry of Education plan includes the following reforms:

— Halve undergraduate loans by reducing the amount borrowers must pay each month to 5% from 10% of discretionary income.

— Increase the amount of income considered non-discretionary and therefore protected against reimbursement.

— Cancellation of loan balances after 10 years of payments instead of 20 years.

— Cover unpaid monthly interest so that no borrower’s loan balance increases as long as they make their monthly payments.

Income threshold

Currently, the non-discretionary income threshold that cannot be used for loan repayment is 150% of the poverty level, or $20,385 per year for a single person, CNBC reported. Under the new plan, this amount would be increased to 225% of the poverty line, or $30,577 per year for a single person.

Justin Short, who had nearly $53,000 in student debt when he graduated from the University of Missouri a decade ago, told CNBC the 5% income cap would be “life-changing” , and also said he would benefit from the higher threshold for non-discretionary income.

Julie Peller, executive director of Higher Learning Advocates, had a similar view, telling CNBC that the Education Department’s proposal could be a game-changer for millions of borrowers.

“It’s a big recognition that people have a lot of other things on their plate (financially),” Peller said.

She also called the interest provision “very important” for low-income borrowers because under the current system, if a borrower’s income is low enough, their loan repayment might not even cover the interest. monthly on his loan. This means that the remaining unpaid interest is capitalized and added to the principle of the loan.

“It basically inflates payments and puts people in a cycle where they can never make progress on their student loans,” Peller said.

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But as CNBC noted, there are still important details to iron out in the coming weeks, including who will be eligible for the program, what types of loans are eligible, and how people can enroll.

“It’s going to take a good amount of clear communication with people so they don’t feel like they’re expecting something they’re not eligible for, and more importantly, so they don’t miss something. they are eligible for,” Peller said. .

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This article originally appeared on GOBankingRates.com: New income-focused student loan repayment plan could positively impact borrowers’ finances for decades

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Elaine R. Knight