When the Department of Education announced a major expansion of Public Service Loan Forgiveness this month, several significant issues that plagued student loan borrowers were fixed.
Before the announcement, the PSLF rejection rate was over 90%. The changes mean that many borrowers who justifiably earned PSLF can now get their loans discharged.
Sadly, many major student loan issues remain. As a candidate, Joe Biden promised to fix PSLF and make life with student loans more manageable. Now that Biden has addressed PSLF, more student loan fixes are likely on the way.
Cutting Payments in Half with a New Repayment Plan
One fix that could help the majority of student loan borrowers is a new repayment plan.
The current income-driven repayment plans charge between 10% and 20% of a borrower’s discretionary income each month. As a candidate, Joe Biden called for the creation of a plan that charged just 5%.
If President Biden created this new IDR plan, borrowers on plans like REPAYE and PAYE could see their payments cut in half. Some borrowers, such as those on the ICR plan, may see payments slashed by as much as 75%.
There is a reason for optimism on this front because Biden can create a new repayment plan without Congressional approval. There may be a debate over the President’s authority to forgive debt via executive order, but there is no question that he is allowed to create a new repayment plan. Notably, President Obama established the REPAYE plan via executive order.
Sherpa Tip: Lower monthly payments help many borrowers, even those who can currently afford their monthly bills.
Signing up for a more affordable repayment plan can help a borrower qualify for a home loan, pay off other high-interest debt, or set aside some extra cash for an emergency.
Speeding up Student Loan Forgiveness
PSLF, after ten years, is the fastest path to federal student loan forgiveness for most. However, there are other options.
For borrowers who don’t have a PSLF eligible job, forgiveness via an income-driven repayment plan is often a goal. At present, getting IDR forgiveness can take as long as 25 years and comes with a few significant hurdles.
Biden could shorten it to 20 years or less.
Biden could use the PSLF expansion as a blueprint to help borrowers who should have already earned forgiveness under an IDR plan. One recent report showed that over two million borrowers could have had their loans forgiven by now, but only 32 actually qualified due to poor loan servicing and complicated rules.
If there is a unifying theme to the many changes Biden has already made to student loans, each move fixed known issues. The problems with the path to IDR forgiveness are well-documented at this point and a reasonable next step for Biden.
Ending the Marriage Penalty for Student Loan Borrowers
Getting married has a considerable influence on federal student loan repayment. Married borrowers have more complicated rules for IDR plan selection, and it may impact how taxes get filed each year.
However, the problem for married borrowers isn’t merely more paperwork. For large numbers of federal borrowers, getting married makes student loan repayment more expensive.
Many newlyweds are shocked to learn that their monthly student loan bill is larger because of their marriage. For some couples, the financial consequences are so severe that they consider a divorce for lower monthly payments.
Sadly, Biden has not commented on this issue as a candidate or as President.
However, the marriage penalty is a significant problem with federal student loans and one that Biden should fix. If he creates a new repayment plan, he can make one that doesn’t impose a marriage penalty on borrowers.
Changing the Standard Repayment Plan and Procedure
The current system for borrowers entering repayment leaves plenty of room for improvement.
One of the first “bills” that borrowers receive is a notice of unpaid interest capitalization. No payment is required, but the statement looks identical to an actual bill. The unpaid interest from four years of college is often quite large. This is a scary and intimidating way to start repayment.
The first actual student loan bill also is an issue. Borrowers are automatically enrolled in the 10-year standard repayment plan. For most borrowers, the 10-year plan has the highest monthly payment. In many cases, the 10-year payment is unaffordable. Seeing the large bill causes some borrowers to panic, and some borrowers choose to ignore their student loans because they cannot afford the bill.
The Department of Education could automatically enroll borrowers in an income-driven repayment plan based upon their most recent tax return. This change ensures that borrowers receive an affordable bill and stay engaged with the repayment process.
At the very least, the Department of Education or loan servicers could contact borrowers before repayment starts and help with repayment plan selection before sending the first bill.
What About Student Loan Forgiveness for All or Debt Cancellation?
Sadly, blanket loan forgiveness for all borrowers looks unlikely.
Biden has resisted calls from Democrats to forgive debt through executive order. At one point, he did request a memo from the Secretary of Education about his authority to cancel debt for all borrowers. We were told it would take a few weeks to produce the memo. However, many months have passed, and we still haven’t heard about the memo.
[11/03/21 Update: The memo has been released, but it is heavily redacted and offers almost no new information.]
Both Biden’s statements and actions suggest that he is more interested in targeted help and addressing specific issues. Canceling out $10,000 or more for all borrowers appears increasingly unlikely.
The Next Steps for Borrowers
The Biden administration has already started the rulemaking process for additional student loan changes.
Borrowers should periodically check on student loan news to stay on top of any changes.
Those who wish to get more proactive should reach out to their elected representatives to share their specific student loan concerns. Mentioning proposed changes already in discussion will also help.
Finally, requests for comments from the public appear in the federal registrar. For example, a few months ago, the Department of Education asked for public input regarding the Public Service Loan Forgiveness Program. Keep an eye on the Education Department’s page on the Federal Registrar for additional opportunities to comment.
