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On August 24th, 2022, the Biden Administration announced a Student Loan Debt Relief Plan.
There are 3 parts to this plan, and for this post I want to focus on Part 3.
Part 1 = Student Loan payment pause and 0% interest has been extended (for the final time) through December 31st, 2022.
Part 2 = Up to $20,000 in cancelation, based on a few qualifications.
If you want to hear more about part 1 and 2, check out my video on the topic.
This information is very important for those of you who will still have student loan debt after the cancelation.
Part 3 = Make the Student Loan System more manageable for current and future borrowers
There are quite a few things that are being implemented under Part 3:
1. Smaller, more manageable payments
The Department of Education is proposing a new income-driven repayment plan that caps monthly payments of undergraduate loans at 5% of a borrowers discretionary income. Previously, the rate was 10%.
They are also raising the amount of income that is considered non-discretionary, meaning the amount considered discretionary income is lower.
These are 2 different things that work together to create a great benefit.
Lower discretionary income + Lower %age of discretionary income = Much lower required minimum monthly payment.
Let me break this down further and provide a few examples.
Discretionary Income = The money that remains after your necessities have been paid for.
This plan guarantees that borrowers earning under 225% of the Federal Poverty level will not have to make a monthly payment. What does that even mean?
Here is the Federal Poverty Level chart:
To calculate 225% of the Federal Poverty Level for 2022, we will multiply $13,590 (from the chart above) by 225%.
$13,590 x 2.25 = $30,577
On this payment plan, any individual who makes $30,577 or below, will not have a minimum payment.
If your family size is larger, you can refer to the chart above and use the same calculation.
For a couple with 2 kids earning less than $62,437, their minimum payment will be $0.
Those earning above these amounts, you will have a monthly payment. Here is how to calculate it:
Let’s assume an individual is making $40,000 a year. Their discretionary income is calculated by subtracting anything above 225% of the poverty level, from their income.
Discretionary Income: $40,000 – $30,577 = $9,423
Minimum required student loan payment per year: $9,423 x 0.05 = $471.15
Minimum required student loan payment per month: $471.15/12 = $39.26
A married couple making $55,000: $57.51/month
$18,310 x 2.25 = $41,197.50
$55,000 – $41,197.50 = $13,802.50 in discretionary income
$13,802 x .05 = $690.13 per year
$690.13/12 = $57.51/month
A married couple with 3 kids making $90,000: $70.60/month
As you can see, the minimum payment for all family sizes and incomes, will be much lower with this plan.
There is one small catch, the 5% cap ONLY applies to undergraduate loans. If you have Graduate school loans, you will still have to pay 10% of your discretionary income. The discretionary income calculation above still applies here.
If you have undergraduate and graduate loans, the cap will be between 5-10% and calculated based on a weighted average of your loans.
2. For borrowers with original loan balances of $12,000 of less, balances will be forgiven after 10 years of payments
Previously, the forgiveness applied after 20 years!
If an individual has a $10,000 loan balance and makes the required minimum monthly payment for 10 years (yes, EVEN if you don’t have to make a payment at all based on your income), that debt will be wiped out.
I don’t suggest trying to do this. Paying off $12,000 or less should be doable within 10 years, but I know there will be some people who are unable to get past poverty level and/or can’t afford anymore than their monthly payment.
3. Cover the borrower’s unpaid monthly interest
This is HUGE and the part of this that I am most excited about. Your loan balance will not grow as long as you are making your minimum monthly payment. Even if your minimum payment is $0!!!
You no longer have to worry about paying thousands of dollars, but watching your balance increase. This is going to save hundreds and thousands of dollars for those who have a balance.
I remember before the forbearance I was paying well over $3,000 in interest each year.
The only negative here is that you will not have a student loan interest tax deduction, but this plan easily outweighs that negative.
Starting Summer 2023, borrowers will allow the Department of Education to automatically pull their income information, therefore, you don’t have to report your income each year manually.
4. PSLF is now more simple and eligibility requirements are easier [*Time sensitive*]
If you work in the public service industry (military, local, federal, state government, non-profit) this is very important!
In the past there have been many issues with the PSLF program, including disqualification from the program if borrower’s were on the incorrect payment plan, if they made lump sum or partial payments, deferred loans, etc.
Now, even if you faced disqualification before, that does not matter (temporarily). The time to cancelation would still be 10 years, including non-consecutively.
You must apply for PSLF by October 31st, 2022.
If you work in public services and don’t think you will pay off your debt in 10 years (or even if you think you can), I highly recommend applying for this asap.
5. Protecting borrowers from steep increases in college costs
A couple of things to mention here:
- Biden signed the largest increase to the maximum Pell Grant in over a decade
- An annual watch list will be published containing the programs with the worst debt levels in the US so students can avoid these programs and to hold the college accountable
This step is to try to prevent students from predatory colleges where credits don’t count or other issues that have come up over the last few years.
Overall, these changes are pretty significant and will help many, many borrowers.
I really hope that current and future borrowers continue to educate themselves when taking out student loans and finances in general.