Great Advice for Grads 2023

HOW EXISTING INCOME-DRIVEN REPAYMENT PLANS WORK Income-driven repayment plans are based on a borrower’s income, not the amount borrowed. Payments typically do not cover all the interest that accrues. After a certain number of payments, the remaining balance is forgiven. That unpaid interest grows over time and, after certain qualifying events, is added to the borrower's balance with penalties. Borrowers who take a month of forbearance — say they lose their job and need to skip a payment — see not only the skipped payment added back to their principal, but also every penny of interest that accumulated over the years. That interest accrual is the key trigger that can lead to balances many times larger than the original debt, even after decades of payments. “Current IDR programs are not optimal from the borrower perspective,” said Daniel Collier, a University of Memphis assistant professor whose research focuses on student loan debt and income-driven repayment and tuition-free policy, in September. “It seems like people are still massively struggling even being enrolled in IDR.”


Repayment choices are simpler The proposal reduces option overload for borrowers.

The government currently offers five different IDR plans, because past iterations were not retired when new ones rolled out. This IDR plan is a revision of the widely used Revised Pay As You Earn plan, known as REPAYE. The department will also phase out or limit new enrollments in three other repayment plans. More income is sheltered Right now, the Education Department calculates IDR payments based on discretionary income — your household income minus 150% of the federal poverty guideline for your family size and location. If your household income is $75,000 for a family of four in Virginia, your non-discretionary income is $45,000 and your discretionary income is $30,000, based on 2023 U.S. federal poverty guidelines. Payments under current IDR plans are a percentage of that $30,000. The new plan places the threshold for discretionary income at 225% of the federal poverty guideline. That same $75,000 household would see payments based on just $7,500 of discretionary income. Required payment is cut in half Current IDR plans require borrowers to pay at least 10% of their discretionary income each month. Under the new plan, income-driven repayment for undergraduate loans would be set at 5% of discretionary income. This means, on top of the lowered repayment amount based on the change in discretionary income calculations, borrowers with undergraduate loans will pay much less.



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