The Biden administration recently released a detailed plan to make it easier for student loan borrowers to wipe out their debts using income-driven repayment plans. The proposed rule from the Education Department is a key step in overhauling the $1.6 trillion federal loan program that has left millions of borrowers with ballooning debts.

The administration first announced the change back in August of 2022 when it unveiled its plan to cancel up to $20,000 in student loan debt for qualifying borrowers. This cancellation plan is now frozen after being blocked by several lower courts, and its validity is now before the Supreme Court. The Supreme Court will hear legal arguments in the case on February 28, 2023 and a ruling is expected before the court’s term ends on June 30, 2023.

Income-driven repayment plans have been in effect for years and were designed to help lower earners pay for college. However, few have been able to use them effectively due to several issues. If enacted, the proposed changes would be a powerful tool creating a student loan safety net in this country, designed to make college affordable, especially for those with lower incomes. They would provide borrowers with significantly lower monthly payments, generous options to become debt-free sooner, an easier path to loan forgiveness, and a promise that unpaid  interest won’t be added to their loan balance.

The amount of discretionary income borrowers must pay each month on their undergraduate loans under the income-driven repayment plan will be halved from 10% to 5%. Borrowers with incomes below 225% (up from 150% currently) of the federal poverty line (i.e., individuals making less than roughly $30,600 annually, or a family of four making less than $62,400 annually) would not have to make any monthly payments on their loans.

To prevent student loan balances from ballooning in the future, borrower loan balances won’t grow if they make their monthly payments, even if a low-income borrower’s monthly payment is set at zero.

The change would also forgive loan balances for people enrolled in the income-based plans after 10 years of payments, down from 20 years under many of the current plans, for borrowers whose original loan balances were $12,000 or less. This faster forgiveness for borrowers owing less than $12,000 could make some degree granting programs, especially at community colleges, effectively free. The Education Department estimates that 85% of community college borrowers would be debt-free within 10 years under this program. This provides a back-door method to accomplish Biden’s previous plan to provide free community college, which was nixed by Congress.

Many borrowers already enrolled in an income-driven repayment plan will also be closer to debt forgiveness. Borrowers who went into forbearance—a temporary payment freeze where interest continues to build up—for at least 36 months will receive 3 years of payment credits toward their 10 years of required payments when payments resume. Payments and interest accrued on federal student loans have been frozen since the pandemic began in March of 2020. They are now scheduled to resume 60 days after the Supreme Court issues their decision on the loan cancellation program. To cut down on the paperwork required, the Biden administration aims to automate much of the process by using the Internal Revenue Service to verify borrowers’ income each year.

The proposed rule must now go through a 30-day period for public comments, after which the department can release its final rule.

What’s The Cost?

In its regulatory notice, the Biden administration acknowledged its plan would increase costs to taxpayers since borrowers would pay less on their loans, effectively converting much of them into grants. The Biden administration estimates that these repayment changes would cost nearly $136 billion over the next 10 years, assuming its debt cancellation plan is upheld. If not, the cost will be much higher, since those who would’ve had their debt cancelled will now be included. The Penn Wharton Budget Model predicts a price tag of up to $450 billion over a longer time period, depending on enrollment and whether colleges continue to raise costs.