Fixing the Federal Student Loan System: What’s the Plan?

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Student loan update: President Biden is proposing significant changes to the federal student loan program, including a new income-based repayment plan. (Shutterstock)

The blanket student loan forgiveness announced by President Joe Biden on Aug. 24 is just part of the administration’s plan to address mounting student loan debt. The plan also includes a proposal for a new income-based repayment plan which, if implemented, would cut borrowers’ monthly payments in half.

Here’s what you need to know about student loan relief options currently available and additional relief that may become available.

It is important to note that the student debt relief plan does not apply to private student loans. However, refinancing can be a way to get a lower interest rate and reduce the overall cost of your student loans. Credible, it’s easy to compare student loan refinance rates from multiple lenders in minutes.

Overview of Biden’s student loan debt relief plan

The administration’s plan has three key elements, as announced on August 24:

  • Extend the federal student loan payment pause until December 31, 2022.
  • Provide up to $10,000 in student loan forgiveness to borrowers with annual incomes below $125,000 ($250,000 for households). Eligible borrowers who have received Pell Grants will be eligible for up to $20,000 in forgiveness.
  • Create a new income-driven repayment plan that will make significant changes to how borrowers repay their loans and make it easier for them to get forgiveness.


How will the plan affect federal student loan repayments?

If implemented, the administration’s proposal for a new income-based repayment plan:

  • Reduce IDR plan payment cap by half – Current IDR plans cap borrower payments at 10% of their discretionary income on undergraduate loans. Biden’s proposal would lower that cap to 5%.
  • Increase the amount of refund protected income — Currently, IDR plans are based on your discretionary income – which is defined as the difference between your annual income and 150% of the poverty level for your household size and where you live. Biden’s proposal would raise that threshold to 225%.
  • Mitigating the bloat effect of capitalization — Borrowers who pay on current IDR plans have their outstanding interest added to their loan principal – a process called capitalization. This is how borrowers who start out with a few thousand dollars in student loans can end up still owing a lot more than their original loan amount after making IDR plan payments for years. Under Biden’s plan, the feds would cover a borrower’s unpaid monthly interest, so their balance doesn’t continue to grow while they make payments on an IDR plan.


How will the plan affect student loan forgiveness?

Previously, people with federal student loans had two ways to cancel their loans. They could either work for an eligible employer in a public service role for a specified number of years, or complete their repayment period on an income-based repayment schedule and have the remaining balance of their loan forgiven.

The Department of Education has already taken several steps to make it easier for borrowers to qualify for its Civil Service Loan Cancellation Program. Biden’s proposal addresses how long it takes to get an IDR plan pardoned.

Currently, borrowers must pay 20 to 25 years on an IDR plan (depending on plan type) before they can qualify for forgiveness of their remaining balance. Biden’s proposal would set that limit at just 10 years for borrowers with balances of $12,000 or less.

How to Get $10,000 to $20,000 Federal Student Loan Forgiveness

If you think you qualify for the general student loan relief announced last week, your first step should be to log into your financial aid account at Make sure your information, including your income and current address, is up to date.

Although the Department for Education says it already has data on nearly 8 million borrowers, it will launch an application for student loan forgiveness by early October. You can sign up to be notified when the app becomes available on the Ministry of Education website. subscription page.


Money-saving options if you don’t qualify for a pardon

If you have private student loans, which are excluded from IDR plans and forgiveness, you will need to find another way to lower the cost of your loans. Or, if you have higher interest Grad PLUS or Parent PLUS loans and don’t qualify for a discount, you may be wondering what your alternatives are.

Refinancing can allow you to change the interest rates and payment terms of your student loans. Here’s how it works:

  • If your credit score is good (or has improved significantly since you took out your first loans), you may qualify for a lower interest rate. A lower interest rate can lower the overall cost of your loans.
  • Refinancing over a shorter repayment period will also reduce your overall interest costs and allow you to get out of debt faster, even though your monthly payment will increase.
  • Refinancing over a longer repayment period can lower your monthly payment and make it more manageable. But you will pay more interest during the term of the loan.
  • If your original student loan had a co-signer, refinancing can be a way to release your co-signer from their obligation.

Keep in mind that refinancing federal student loans with a private loan means you will lose access to federal benefits such as income-driven repayment plans and loan forgiveness. Before deciding to refinance, it’s a good idea to compare rates from several lenders. With Credible, you can easily see your prequalified student loan refinance rates in minutes.