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In May, the world watched in horror once again as the US once hit its debt ceiling, and the bitter infighting between Congressional Democrats and Republicans threatened to derail the world economy. Democrats once again wanted the debt ceiling to be raised without conditions, while Republicans wanted massive spending cuts, and were willing to risk a default to get it.
Fortunately, in the end cooler heads prevailed and a deal was reached that allowed the government to continue to pay their debts without going into default, and everyone promptly forgot about it.
After three years of relief, the U.S. Department of Education has announced that the pause on student loan payments—which was instituted during the Covid-19 pandemic—will be coming to an end.The End Of The Student Loan Payment Pause Will Have Large-Scale Impact: Forbes
That’s right. The last three years of paused student loan repayments is officially coming to an end, thanks to the concessions that House Speaker Kevin McCarthy forced the White House to agree to in exchange for avoiding default on the national debt.
Student loans were paused in 2020 by then-President Trump when COVID-related shutdowns forced businesses to shut down and mass unemployment to sweep the nation. It was meant to be temporary measure, but as we all now know the pandemic dragged on…and on…and on. So the temporary pause kept getting extended.
And when Joe Biden became president, he kept extending this pause as part of his administration’s effort to help out student borrowers. As of today, the student loan pause has been extended 8 times, resulting in a nearly 3 year period where minimum payments were suspended and interest accrual was stopped for millions of people that had government-funded student loans.
But now, those bills are coming due.
Congress recently passed a law preventing further extensions of the payment pause. Student loan interest will resume starting on Sept. 1, 2023, and payments will be due starting in October.Studentaid.gov
So that means if you haven’t thought about your student loans for the past few years, you might want to log into your Federal Student Aid portal here. If you’ve forgotten your password and need to unlock your account, now’s the time to do it.
Next, make sure your payment information is up to date. A lot has happened in 3 years, and you may have switched banks (or states) since then. If your main bank before the pandemic happened to be Silicon Valley Bank, you probably have some updating to do.
The New REPAYE Program
However, the news isn’t all doom and gloom. Because as it turns out, in January 2023, the Biden administration’s Department of Education published a proposal for changing how income-driven repayment works, particularly to the REPAYE program, that has the potential for making repaying student loans considerably easier. And the best part, is that it just might take effect right as student loan repayments restart.
Here’s how it works:
First, they’re changing the definition of discretionary income. The REPAYE program in its current form limits the amount a borrower has to pay back to 10 percent of their discretionary income, which is defined as the Adjusted Gross Income (AGI) you earn above 150 percent of the Federal Poverty Level. So in other words…
Discretionary Income (old) = AGI – 150% x FPL
The changes propose to increase this definition to the AGI above 225 percent of the Federal Poverty Level, so the above formula turns into this…
Discretionary Income (new) = AGI – 225% x FPL
While it may seem like a bad thing that your “Discretionary Income” will go down due to this, it’s actually a good thing since the size of your monthly payment is based of what the government considers as your discretionary income. Lower discretionary income means lower monthly payments.
Let’s demonstrate this by doing some light MATHING SHIT UP.
Let’s say your income is $50,000. In 2023, the Federal Poverty Level for a single person is $14,580. Under the old REPAYE program, your discretionary income would be…
Discretionary Income (old) = $50,000 – $14,580 x 150% = $28,130.
But now, with the increased FPL allowance, your discretionary income would be…
Discretionary Income (new) = $50,000 – $14,580 x 225% = $17,195.
Right away, you can see that this is going to cause a pretty dramatic decrease in your monthly payment under the new rules.
But WAIT, there’s more!
The second change they’re making is the percentage of your discretionary income that will go towards your student loans will be reduced from 10% to 5% (Note: This is for undergrad degrees only. Graduate debt payments remained at 10%).
So under the old REPAYE rules, your minimum loan payment would be calculated by taking 10% of your discretionary income, so in the above example…
Monthly Payment (old) = $28,130 x 10% = $2813 per year, or $234.42 per month.
But under the proposed REPAYE plan, your loan payment would be only 5% of your (now much lower) discretionary income, so in the above example with the new discretionary income number…
Monthly Payment (new) = $17,195 x 5% = $859.75 per year, or just $71.65 per month!
You can see that the monthly minimums are reduced quite dramatically, by two effects: 1) The increase in the “FPL allowance” that’s used to calculate your discretionary income, and 2) The reduction in the percentage of your discretionary income that’s used to determine your maximum monthly payment.
But WAIT! There’s still more!
A third major change being made to the REPAYE program is how interest is charged on your loan.
The Department estimates that as many as 70 percent of borrowers on existing IDR plans have seen their balances grow after entering those plans. In many cases, even borrowers making all required payments see their balances grow because the payment they can afford is lower than the accrued interest. Under the Department’s proposed regulations, borrowers won’t see their balances balloon while they’re making regular payments, including those who have a $0 payment.
Under the proposed plan, a borrower would continue to have their monthly payment first applied to interest, but if it is not sufficient to cover that amount, any remaining interest would not be charged.Transforming Income-Driven Repayment: Dept of Education
This is a pretty major change in how the the student loan program is structured. In the past, if you got a useless degree (or worse, didn’t graduate at all) and couldn’t get a sufficiently high paying job to make a dent in the loan, the income-based repayment programs could potentially allow you to drop your monthly payment to $0 without going into default. But if you did this, interest would still keep accruing, and your loan would just keep getting bigger. It wasn’t really a get-out-of-jail-free card, as much as it was simply trading one problem for a bigger one down the road.
That’s no longer the case with this change. Under this new system, if your monthly minimum gets calculated to be so low that it can’t cover the interest due on the loan, the government will waive the interest. Your balance won’t go up, even if you pay $0, and it won’t affect your ability to have your loan forgiven down the road, either through the Public Service Loan Forgiveness (PSLF) program or the normal loan forgiveness that happens after 20 years for undergrad degrees.
When Will This New Program Get Rolled Out?
All the changes that I described above were outlined in a proposed rule change that the Department of Education published in January 2023. Little fanfare was made of these changes at the time, but now that the debt ceiling deal has forced student loans to resume earlier than expected (and with the $10k student loan forgiveness program still tied up in court challenges), the timelines for its implementation has been pushed up.
The current plan is for these changes to get rolled out in July 2023, just in time to help student loan borrowers who may not have the ability to resume their payments without help.
As for whether these changes may get blocked or held up before then, I have no idea. You can never predict what happens in Washington these days, but one thing that I found interesting about these changes is that they appear to be deliberately structured to avoid having to go through the normal channels of power.
If Biden were to create an entirely new program to help student borrowers, he’d have to pass a law to do it, which means crafting a bill, getting votes in Congress, dealing with filibusters, etc. And as we’ve seen with student loan forgiveness, executive actions can be challenged in the court system.
But tweaking rules on an existing program bypasses all that. Even though these changes were announced back in January and the government sought public feedback on them at the time, there hasn’t been a lot of pushback from the opposition. This suggests that either they don’t know about it (unlikely), or they really don’t have that much power to block it.
For that reason, I’m reasonably confident that these changes to the REPAYE system have a good chance of becoming reality.
The student loan crisis is a huge issue affecting millions of borrowers. It keeps people stuck in the hamster wheel of debt repayment for decades, sometimes into their retirement, and for the longest time there really wasn’t an easy way out since student loans are one of the only types of debt that can’t be discharged in bankruptcy.
These proposed changes to the REPAYE program have the potential to change all that. In my view, it appears to be the most significant reform to the student loan system in over a decade. It fixes one of the biggest problems in the current student loan system: That student loan balances can keep getting bigger even if you participate in an Income-based repayment program.
Time will tell whether this proposal actually becomes a reality, but whatever happens to this program, we will keep a close eye on things and let everyone know what happens right here on this blog!
So, are you ready for student loan payments to restart? What do you think will happen to the Biden administration’s proposed changes to the REPAYE program? Let us know what you think in the comments below!
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