For the family with $75,000 in household income, that’s the difference between a $250 monthly payment and a $31 payment. Borrowers with only graduate school loans still would pay 10%. Borrowers with both undergraduate and graduate loans would pay a weighted average between 5% and 10%. “A borrower who has $20,000 in loans from their undergraduate education and $60,000 in loans from their graduate study would pay 8.75% of their income,” explained the Education Department. “A borrower who has $30,000 in loans from each would pay 7.5%.” Forgiveness comes sooner Currently, borrowers are eligible for forgiveness of their remaining student loan balance after 20 or 25 years under current IDR plans, regardless of how much money they took out for school. However, the new plan would cut that down to 10 years for borrowers with original loan balances of $12,000 or less. With the new plan, the Education Department projects that 85% of all community college borrowers will be debt-free within 10 years. Unpaid interest is cancelled Currently, REPAYE payments do not cover all of the interest on a loan each month. The government covers half of the unpaid interest and the rest mounts over time. Under the revised plan, any interest unpaid each month would be covered by the government, so long as the borrower keeps up with their monthly payments. This leftover interest would not accrue. WHO CAN SIGN UP FOR THE NEW IDR? Borrowers with federal student loans will be able to sign up. Private student loans are not eligible for IDR or any other student debt forgiveness options from the government, like Public Service Loan Forgiveness. Parents who took out parent PLUS loans to help their child pay for school also cannot sign up for the revised IDR plan. They are only eligible for the government’s income-contingent plan, under which they pay 20% of discretionary income for 25 years before the remaining amount is forgiven. Parent PLUS borrowers can also take advantage of PSLF forgiveness under the recent IDR waiver if they qualify.
This article The New Income-Driven Repayment Plan: How It Works was originally published on NerdWallet on January 30, 2023.
CECILIA CLARK and ELIZA HAVERSTOCK are writers at NerdWallet.
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