Benefits of Biden’s Student Debt Plan Don’t Stop at $10K Cancellation

Kenny Stancil, Common Dreams

While disappointed that President Joe Biden declined to wipe out all $1.6 trillion in federal student loan debt held by more than 45 million borrowers, progressives welcomed other relief measures announced Wednesday.

Biden’s move to cancel up to $10,000 in debt for federal borrowers with individual incomes under $125,000—and up to $20,000 for Pell Grant recipients—has received most of the attention.

But according to many observers, the president’s modification of the income-driven repayment (IDR) program may end up having an even more significant positive impact on millions of Americans.

Under a new IDR plan proposed by the Department of Education (DOE), monthly payments for undergraduate loans will be capped at 5% of an individual’s discretionary income—half of what one is required to pay under most existing plans—saving borrowers an average of more than $1,000 per year.

In addition, the DOE plans to increase the amount of income that is deemed nondiscretionary and thus protected from repayment. Such a change guarantees that “no borrower earning under 225% of the federal poverty level—about the annual equivalent of a $15 minimum wage for a single borrower—will have to make a monthly payment,” according to a White House fact sheet.

Unlike existing IDR plans, the new plan will cover a borrower’s unpaid interest, meaning that loan balances won’t continue to balloon as long as monthly payments are being made—even if monthly payments are $0 based on a person’s income.

Moreover, any remaining debt held by borrowers with original loan balances of $12,000 or less will be eliminated after 10 years of payments rather than 20, a reform that DOE predicts will allow almost all community college students to be debt-free within a decade. The remaining balances of most borrowers will be canceled following 20 years of payments.

These changes to income-based repayment rules are “a really big deal,” tweeted Isaiah Baehr-Breen, an aide to Rep. Ilhan Omar (D-Minn.), one of the leading advocates for universal student debt cancellation. “I hope those of us who understand it still isn’t enough can still celebrate what it’ll mean for a lot of people.”

Baehr-Breen’s sentiments were echoed by others. The American Prospect managing editor Ryan Cooper argued on social media that Biden’s proposed IDR plan—especially the DOE’s redefinition of nondiscretionary income, which effectively abolishes payments for individuals making $30,578 or less per year—is “potentially a bigger deal than forgiveness.”

Journalist Matthew Chapman, meanwhile, praised the DOE’s decision to let borrowers off the hook for unpaid interest, the accrual of which has made student loan repayment particularly challenging and sometimes impossible.

As a result, Chapman explained, “no borrower on an IDR plan will have their balance go up,” and “if they go the whole 20-25 years, they have a much lower remaining balance to forgive, which means the tax penalty for getting the remaining balance forgiven is much smaller.”

Roughly 20 million borrowers could see their entire student loan balance erased as a result of Biden’s move to cancel $10,000 to $20,000 in debt for all but the top 5%, according to the White House. Another 23 million borrowers are projected to benefit to a lesser degree.

Nearly eight million people may be eligible for automatic relief because the DOE already has the income data necessary to determine their eligibility. Thanks to the American Rescue Plan, canceled student debt won’t be treated as taxable income for federal tax purposes through 2025.

“Congress ideally should extend the student loan forgiveness tax exemption in the American Rescue Plan,” Chapman tweeted. “But even if that doesn’t happen, Biden’s plan considerably slashes any potential tax penalty” because those on the new IDR track won’t be responsible for accrued interest and will therefore have lower outstanding balances.

To facilitate a “smooth transition back to repayment,” the DOE is extending the student loan freeze one “final time” through December 31.

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