Borrowers can look forward to lower monthly bills and quicker forgiveness under the latest IDR changes.

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.

The Basics of Biden’s New IDR Plan

The big headline on the new IDR payment is that monthly payments are lowered to 5% of discretionary income for certain borrowers. The current plans charge 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.

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

The good news for those who find the proposed rules unfair is that there is still a chance for changes to be made.

The public comment period on the new rules is now open. Anyone with thoughts to share can leave a comment with the Department of Education. The deadline for comments is February 10, 2023.

If we get enough people to speak out, the final version of the new IDR plan could be improved.