Borrowers can look forward to lower monthly bills and quicker forgiveness under the latest IDR changes and the creation of the new SAVE Plan.
Unfortunately, some will benefit far more than others.
The new IDR program will likely benefit most borrowers, but the new rules for calculating monthly payments may disappoint many teachers and social workers.
A Note from the Sherpa: This article was first written in January 2023 and criticized the new IDR plan in development, now called SAVE.
At that time, I encouraged people to leave comments with the Department of Education during the comment period.
The Department of Education responded to these comments, and their full explanation has been added to the end of the article.
The Basics of the SAVE Plan
The big headline on the new SAVE Plan is that monthly payments are lowered to 5% of discretionary income for certain borrowers. The previous plans charged a minimum of 10% of discretionary income. This means that the eligible borrowers will see their payments cut in half.
The IDR revisions also include many other tweaks that improve life on IDR:
- New Discretionary Income Calculation – IDR payments are based on monthly discretionary income, currently set at 150% of the federal poverty level. The new calculation will set discretionary income at 225% of the federal poverty level. This means more borrowers will qualify for $0 per month payments, and all borrowers will get a lower monthly bill.
- Quicker Forgiveness – The current IDR rules forgive balances after 20 or 25 years of repayment, depending on the plan. Under the new rules, borrowers with an original balance of less than $12,000 will qualify for forgiveness after ten years.
- Unpaid Interest Forgiven – Many borrowers have IDR payments lower than the monthly interest that their loan charges. Most IDR plans eventually add unpaid interest through interest capitalization. On the REPAYE plan, borrowers currently get a subsidy for half of the unpaid interest. Under the new plan, all unpaid interest for IDR borrowers gets canceled.
Who Qualifies for 5% Discretionary Income Payments?
Unfortunately, the new payment calculation only helps certain borrowers.
All undergraduate student debt is eligible for the 5% discretionary income payment. Graduate debt still must be repaid according to a 10% discretionary income calculation.
Borrowers who have both undergraduate and graduate debt will pay according to a weighted average — if you have mostly graduate loans, you will be closer to 10%, and if you have mostly undergraduate debt, you will be closer to 5%.
This new proposed rule deserves some extra scrutiny.
How will the plan affect your monthly bill? Try the new SAVE calculator to estimate how much you will spend each month on the new plan.
Treating Graduate Debt Differently than Undergraduate Debt
On the surface, it seems perfectly reasonable to charge more to borrowers with graduate school debt.
Graduate borrowing limits are much higher, so graduates often have larger balances. Additionally, graduate school educations often lead to lucrative jobs. The proposed rule means doctors and lawyers pay more than community college graduates.
In theory, drawing the line between graduate and undergraduate debt seems fair.
In practice, this line hurts many professionals who don’t earn lawyer or doctor salaries. At the top of the list would be teachers and social workers — professionals who are often required to attain a master’s degree.
An Example of the Unfair Calculations
To see how treating graduate and undergraduate debt differently leads to bad outcomes, let’s look at a hypothetical:
- Adam has a four-year economics degree. Adam got help paying for college from his parents and borrowed a total of $20,000 to pay for his education. He works as a banker. Because his debt was entirely undergraduate, he qualifies for 5% discretionary income payments.
- Bob is a teacher. Bob worked during college and became a rare graduate without any federal loans. However, because Bob needed a master’s degree to teach, he borrowed $20,000 to pay for his master’s program. Bob’s monthly student loan bill will be based on 10% discretionary income payments.
Should Bob have to pay double the rate of Adam? If they had the same income, the teacher would pay twice as much as the banker.
By drawing a distinction between graduate and undergraduate debt, we create a system where bankers and computer programmers get better terms than teachers and social workers.
A Better Way to Target IDR Relief
It’s reasonable for the government to want to lower IDR payments for borrowers with smaller balances or lower incomes.
If that is the goal, there are better ways of achieving it.
If the government wants to ensure that high earners pay a higher rate, they can do that. They could charge 0% on income up to 225% of the federal poverty level, charge 5% on income between 225% and 500%, and 10% on the remaining income.
This approach would mean well-paid doctors and lawyers still pay a higher percentage of their income, but teachers and social workers keep a larger share of their income.
Similarly, if the goal is to make borrowers with larger balances pay more, the government could also do that. They could charge 5% of discretionary income on balances up to $50,000 and 10% on the remaining debt.
Changing the Rules
When this article was first written, it had contact information for how to leave a public comment with the Department of Education.
Enough people raised comments on this exact issue that the Department of Education formally responsed to our criticism in the official release of SAVE in the Federal Registrar.
Here is their response:
Comments: Many commenters emphasized that most States require a graduate or professional degree to obtain certification or licensure as a social worker, clinical psychologist, or school counselor. These commenters believed that, given such a requirement, borrowers working in these professions should be eligible to receive the same REPAYE plan benefits as undergraduate borrowers.
One commenter stated that, while some borrowers with graduate degrees will eventually become wealthy, many graduate-level borrowers will be in a low- to middle-income bracket, such as those seeking employment or who are employed in the field of social work. The commenter went on to explain that, even though teachers and social workers earn approximately the same salary, social workers will be penalized because they will have to pay a higher share of their income for a longer period of time due to their need to borrow more in graduate loans.
Discussion: We decline to make the changes requested by the commenters. It is true that many teachers and social workers attain graduate degrees as part of their education; according to data from the National Center for Educational Statistics, over 50 percent of public school teachers from 2017 — 2018 held a graduate degree. And as of 2015, 45 percent of social workers held a graduate degree. But teachers and social workers are also often eligible for other student loan forgiveness programs, such as PSLF, which shortens the repayment window to ten years for those who work consistently in the public or non-profit sector. Other programs include Teacher Loan Forgiveness for those who serve at least five years as a full-time teacher in an eligible low-income school. As the commenter acknowledges in the first part of their comment, many borrowers with graduate degrees will earn high incomes. For that reason, setting payments at 5 percent of discretionary income for graduate loans would raise concerns about targeting these repayment benefits to the borrowers needing the most assistance.
Changes: None.
Lessons for Next Time
Obviously, it would have been nice to see the Deparment of Education change the rules in light of our complaints.
However, it was nice to see that our comments recieved consideration, and the Department of Education did have a thoughtful response.
I still think the Department of Education could have created a system that better protects teachers and social workers by distinguishing payments based on income or debt size, but there is no denying that SAVE is a big improvement over the other IDR plans.
