Biden’s Student Loan Forgiveness Plan: Your Questions, Answered

Could you remind me how income-driven repayment, or I.D.R., works?

There’s a confusing assortment of plans available, and now there’s a new one coming. President Biden is proposing a rule to create a new plan that will substantially reduce future monthly payments for lower- and middle-income borrowers.

For now, the alphabet soup includes PAYE, REPAYE, I.C.R., and I.B.R. (which comes in two versions; the latest has slightly better terms for newer borrowers).

The rules are complicated, but the gist is simple: Payments are calculated based on your earnings and readjusted each year.

After monthly payments are made for a set number of years — usually 20 — any remaining balance is forgiven. (The balance is taxable as income, though a temporary tax rule exempts balances forgiven through 2025 from federal income taxes.)

Monthly payments are often calculated as 10 or 15 percent of discretionary income, but one plan is 20 percent. Discretionary income is usually defined as the amount earned above 150 percent of the poverty level, which is adjusted for household size. PAYE usually has the lowest payment, followed by either I.B.R. or REPAYE, depending on the specific circumstances of the borrower, said Mark Kantrowitz, a student aid expert. The new plan will change that calculus (more on that below).

There’s a dizzying variety of rules, and the existing plans aren’t a cure-all. Even though some borrowers may be eligible for a $0 payment, the plans aren’t always affordable for everyone. The formulas aren’t adjusted for local cost of living, private student loans or medical bills, among other things.

Article source: https://www.nytimes.com/2022/08/24/business/biden-student-loan-forgiveness.html