What you need to know about Biden’s new student loan proposal

The plan will cut student debt payments by millions and offer much more generous terms to keep the debt from snowballing.

WASHINGTON. The White House is promoting a proposal that will lower student debt payments for millions of Americans now and in the future, offering a new way to pay off federal loans at much better terms.

President Joe Biden announced the repayment plan in August, but it was overshadowed by his sweeping plan to reduce or eliminate student debt for 40 million Americans. However, despite the fee plan’s low profile, some education experts see it as a more powerful tool to make college affordable, especially for people on lower incomes.

Education Department officials on Tuesday called the new plan a “student loan safety net” that will prevent borrowers from becoming overwhelmed with debt.

“Student debt has become a dream killer,” Education Minister Miguel Cardona said. “This is a promise to the American people that we will finally fix the broken system and make student loans affordable.”

Biden, a Democrat, is pushing the repayment plan even as his lump sum debt relief faces an uncertain fate before the Supreme Court. The White House asked the court to uphold the plan and dismiss two legal challenges from conservative opponents. The Biden administration submitted its summary last week, with oral presentations scheduled for Feb. 28.

The Department of Education formally proposed the new repayment plan on Tuesday by publishing it in the Federal Register, beginning a public comment period that often takes months.

What’s in the plan?

If finalized, the proposal would lead to a major overhaul of income-based debt repayment plans, one of several payment options offered by the federal government. As a result, the plan will have lower monthly payments, an easier path to forgiveness, and the promise that unpaid interest will not be added to the borrower’s loan balance.

The federal government currently offers four types of income-focused plans, but the proposal will basically phase out three of them, focusing on one streamlined option, cutting down on the confusing array of options borrowers now face.

Under existing plans, monthly payments are capped at 10% of the borrower’s discretionary income, and those making less than $20,400 a year are not required to make payments. The new proposal would limit student loan payments to 5% of borrowers’ salaries, cutting their bills in half, and would require payment only for those earning more than $30,000 a year.

As long as borrowers make their monthly payments, any unpaid interest will not be charged. The change is intended to prevent borrowers from adding unpaid interest to the balance of a loan, which can cause debt to snowball even as borrowers make payments.

Notably, the proposal would also make it easier to write off debt after years of payments. Existing plans promise to write off any remaining debt after 20 or 25 years of payments. The new plan will write off all remaining debt after 10 years for those who have borrowed $12,000 or less. For every $1,000 borrowed in excess of that amount, a year was added.

Regular graduates of a four-year university will save about $2,000 a year over current plans, while 85% of community college borrowers will be out of debt within 10 years, the Biden administration said.

Proponents see the proposal as a significant step towards college affordability. Some say it’s so generous that it comes close to free community college, a campaign promise Biden pushed through but failed to deliver.

Opponents on the right criticized the updated plan as an unfair and overpriced handout. The Biden administration estimates that the repayment plan will cost nearly $138 billion over the decade, with some critics putting it closer to $200 billion.

Even some leftists question the wisdom of the idea, saying it’s so generous that it effectively turns student loans into grants that don’t have to be repaid. They warn that this could lead to more students taking out loans, and it could encourage colleges to raise tuition fees if they know students won’t get hooked.

Still others have called on the administration to phase out income-based payment plans entirely, calling them a failed policy. Critics cite a federal report from last year that said careless oversight of the program left thousands of borrowers stuck with debts that should have been forgiven.

Cardona said his agency is working on other proposals that would hold colleges accountable if their students are overwhelmed with debt. One idea Biden is pushing is to warn the public about programs that leave graduates saddled with debt.

The Department of Education on Tuesday began the process of reaching that goal by asking the public about how best to identify “low-value” programs.

The Associated Press Education Group receives support from the Carnegie Corporation of New York. AP is solely responsible for all content.

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