What president Biden’s new student-loan payment plans mean for you

On Tuesday, the White House disclosed a plan that would lower monthly payments for many borrowers and speed up the process of getting debt wiped out. The Education Department is expected to put out a final version of the rules after a 30-day public-comment period.

The plan comes as millions of student loan borrowers are still waiting for the Supreme Court to rule on President Biden’s larger debt relief plan later this year. Until then, millions wait in limbo.

The changes disclosed Tuesday are directed to the Education Department’s Revised Pay as You Earn Plan. Under the existing program, few borrowers managed to have their debt wiped out completely. Student loan industry leaders say the changes will allow many more people to eliminate their debt sooner.

Comparing the various repayment options remains complicated, and borrowers will have to do the math to determine whether this new plan makes sense for them, said Scott Buchanan, executive director of the Student Loan Servicing Alliance, a nonprofit trade association for student loan servicers.

“I think that’s going to be a challenge for borrowers and those looking to project what the costs of borrowing are going to be," he said.

Here is a breakdown of how the plans work and how to decide which option makes the most sense.

What is an income-driven repayment plan?

An income-driven repayment (IDR) plan calculates your monthly student loan payment based on your income and family size. Currently, any debt remaining on many of the existing IDR plans can be wiped out after 20 years of payment. Under the new plan, the term would be reduced to 10 years for borrowers with balances under $12,000.

Currently, the Education Department offers four income-driven repayment plans: the Revised Pay as You Earn Plan, which the proposed rule would effect, and three others: the Pay as You Earn, Income-Contingent Repayment and Income-Based Repayment plans. The new regulations would phase out those latter three plans and put most borrowers into the Revised Pay as You Earn plan, or the Repaye plan.

How will my repayment terms change?

Previously, the Repaye plan required borrowers to make payments equivalent to at least 10% of their discretionary income. The new rule proposes cutting that number in half, allowing borrowers to pay 5% of their discretionary income on undergraduate loans.

Additionally, those with incomes below 225% of the federal poverty guidelines—or around the annual equivalent of a $30,600 income for a single borrower or about $60,000 for a family of four, according to U.S. Department of Education—wouldn’t have to make monthly payments on their loans at all. The months of $0 payments would count toward the 10- or 20-year threshold for forgiveness.

Under the existing plans, many borrowers’ balances increase despite making required monthly payments, due to compound interest. As many as 70% of borrowers already on IDR plans and making regular monthly payments saw loan balances grow, according to estimates from the Education Department. Under the proposed changes, borrowers making regular payments won’t see interest inflate their loan balance—even for those whose income qualifies them to make $0 monthly payments.

Should I switch my plan before loan payments resume?

There is little benefit to trying to change plans before payments resume later this year, Mr. Buchanan said. He cautions borrowers against making any changes until the rules are finalized. The proposals must undergo a 30-day public comment period before the Education Department can release a final rule.

Until then, borrowers should wait to take action.

“Practically speaking, there is nothing to do right now," he said.

How do I know if an IDR plan is right for me?

Borrowers with loan balances amounting to $12,000 or less will greatly benefit from this plan. The proposed rule would wipe out existing loan balances after 10 years of repayment, down from 20 under the current plan.

For others, it pays to crunch the numbers.

Try the Education Department’s loan simulator tool. This tool can take your existing information and help calculate your loan payments, select between different repayment options and more.

What is happening with student loan forgiveness?

In August 2022, President Biden announced a plan to cancel up to $20,000 in debt for qualified borrowers. The plan was put on hold due to legal challenges. In February, the Supreme Court will hear arguments that could decide the fate of the program.

Until then, borrowers shouldn’t make any huge financial plans or act on the promise of that forgiveness, Mr. Buchanan said.

“The danger is people making financial decisions and choices premised on something that may or may not happen," he said.