Student loans: Biden's changes to repayment plans should go further, advocates say

One of President Joe Biden’s less headline-grabbing measures to address the student loan crisis last week aims to make debt repayment more affordable for both current and future borrowers.

The president is making four key changes to income-driven repayment plans to reduce monthly payments, prevent ballooning balances, and provide loan forgiveness after a decade of making payments.

While many advocates support the changes to these repayment programs, they say more needs to be done to definitively solve the student debt crisis.

“IDR is one area they do have authority to change through rule-making," said Jessica Thompson, vice president at The Institute for College Access & Success (TICAS), who supports the changes. But “it doesn’t address the systemic cause of funding higher education … [The] administration is limited to what they can do.”

Biden’s IDR reforms

President Biden rolled out his reforms to IDR plans after announcing student loan forgiveness of up to $20,000 for qualifying borrowers and extending the moratorium on student loan payments until the end of the year.

Income-driven repayment plans have existed since the 1990s and are intended to help provide affordable loan payments.

Currently, there are four IDR plans: income-contingent repayment (ICR), income-based repayment (IBR), pay as you earn (PAYE), and revised pay as you earn (REPAYE). Each plan offers some form of automatic loan forgiveness of remaining balances after 20 to 25 years of repayment in the plan.

But advocates point to some major problems with the plans including their complexity, low rates of forgiveness, and growing balances due to accrued interest.

“Income driven repayments has been a key focus of TICAS and we’ve been closely following,” Thompson told Yahoo Money. “Although some were surprised by Biden’s IDR reform, last fall there were three administrative sessions for a negotiated rule-making change process for IDR and we’ve been waiting since December to see Biden’s next steps, which he announced with loan forgiveness."

Income exclusion allowance

Biden’s first reform was to increase the income exclusion amount for IDR programs. This figure is the amount of income a borrower requires for basic needs and isn’t considered when determining the borrower’s payment.

Currently, that amount set aside is equal to 150% of the federal poverty level based on the borrower’s family size. Biden’s plan increases it to 225% of the federal poverty level.

“In the past, if you used the poverty line as an index it worked for some people in rural America but not for people who lived in urban areas with higher costs of living,” Cody Hounanian, executive director of Student Debt Crisis Center (SDCC), told Yahoo Money. “Increasing the ceiling from 150% to 225% benefits more people.”

Discretionary income

The second change decreases the amount of your discretionary income that goes toward your loan payment from the current 10% to 5% for undergraduate loans only. Discretionary income is your adjusted gross income (AGI) minus your income exclusion allowance (see above). The change effectively cuts in half the amount that borrowers have to pay each month.

Interest elimination subsidy

Biden’s plan also eliminates the negative amortization scenario where the balance grows as interest accrues because the IDR payment is too small to cover the interest payment.

For example, if the IDR calculator determined the most you could afford to pay was $0 per month, you would still accrue interest on the loans. The interest payments would cause borrowers to fall deeper into debt.

“Borrowers were hopeless because their balances were increasing even though they were doing everything they needed to do,” Hounanian said. “It made their situation worse, undermining the premise of why IDR was beneficial.”

Under the current IDR plan, there’s a partial subsidy to cover the interest. Under Biden’s plan, the subsidy would cover the interest in full.

Automatic loan forgiveness

Currently, borrowers enrolled in IDR plans will have their remaining balance automatically forgiven after 20-25 years of payments, depending on the plan. Biden’s plan shortens that to 10 years of payments for borrowers whose original principal was $12,000 or less.

Reforms still fall short

Although Biden’s plan addresses negative amortization through its subsidy, other negatives to current IDR plans remain, mainly interest capitalization and how previous payments outside of IDR plans are treated.

Currently, if a borrower is enrolled in one of the four IDR plans and switches to a different plan or miss certain deadlines, interest capitalization occurs. This means any unpaid interest charges will accrue and be added to the student loan balance in the new IDR plan. Each IDR has its own rules on how interest is capitalized.

“Currently, borrowers whose payments are very low may see interest accrue and added to their principal balance,” Natalia Abrams, president and founder of the Student Debt Crisis Center, told Yahoo Money in a statement. “Borrowers who miss certain deadlines, like income certification, may see accrued interest capitalized.”

Additionally, payments a borrower made before enrolling in an IDR plan do not count towards the 20-25 years of payments eligible for automatic loan forgiveness.

Advocacy groups are concerned that unless Biden issues an IDR waiver that retroactively allows payments borrowers made before enrolling in an IDR plan to count towards IDR payments, then many borrowers will miss out on automatic loan forgiveness.

“The most recent data from ED reveals that only 32 IDR borrowers have ever successfully canceled their loans, even though 4.4 million borrowers have been in repayment for 20 years or longer,” a coalition of more than 100 student advocacy groups said in a signed letter to the Education Department in February. “An internal analysis prepared by the largest student loan servicer, PHEAA, found that of its more than 8.5 million customers, only 48 borrowers would receive debt cancellation under IDR by 2025.”

The coalition letter highlighted another concern regarding loan servicers that “have consistently engaged in a variety of abusive practices and…errors that have long-term negative consequences for borrowers…[so that] many borrowers are unable to meet annual deadlines or simply forego the very plans that could help them repay their loans successfully.”

“An IDR waiver is essential to restore the broken promise of IDR,” the coalition letter said.

Some student advocates also see IDR plans as part of the student loan problem because they don't address the systemic cause of the debt crisis: funding higher education.

“Clinton pushed non-solutions like this and everyone said the student debt crisis is solved, but when George W. Bush was president, everyone was willing to admit that the Clinton policies failed,” Thomas Gokey, legal and policy director at The Debt Collective, told Yahoo Money. “Bush did the same thing with … reforms to IDR. Obama tried reforms and now Biden. It will be another decade before everyone admits none of this addresses the problem.”

Ronda is a personal finance senior reporter for Yahoo Money and attorney with experience in law, insurance, education, and government. Follow her on Twitter @writesronda

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