The future of student loan repayment, explained

Congressional Republicans are quietly working toward one of the most consequential overhauls in the history of the federal student loan program – one that would affect the lives of millions of borrowers.

At the center of that overhaul is an effort to sunset most of the current student loan repayment plans and offer future borrowers a simple binary: pay the same amount every month or tie your payments to your income.

The overhaul is part of Republicans' reconciliation package, which, if passed, would also extend Trump's 2017 tax cuts.

If you want to read the overhaul's 103 pages of legalese, have at it. If not, here's a breakdown of how Republicans want to reimagine student loan repayment:

1. The standard plan

Under this new standard plan, new borrowers would agree to a repayment window between 10 and 25 years, depending on the size of their debt, with what they owe being divided up, along with interest, into equal monthly payments, like a home mortgage.

Under this plan, borrowers with larger debts would qualify for a longer repayment period:

• A borrower who owes less than $25,000 would repay over 10 years. 
• Owe between $25,000 and $50,000? Repayment would expand to 15 years.
• Between $50,000 and $100,000: Repay over 20 years.
• Anyone owing more than $100,000 would repay over a 25-year period. 

Borrowers with current loans would not have access to this plan but would still have access to a host of older plans, including standard repayment options ranging from 10 to 30 years.

2. The Repayment Assistance Plan

For borrowers worried they don't earn enough to cover the rigid monthly payments of the standard plan, Republicans are also creating what they call their Repayment Assistance Plan for future and current borrowers alike.

Payments would, for the most part, be based on borrowers' total adjusted gross income (AGI).

Borrowers earning $10,000 or less would be asked to pay $10 a month. Those earning between $10,000 and $20,000 would have a payment based on 1% of their AGI. Between $20,000 and $30,000, it would be 2% of AGI and so on up the income scale with repayment topping out at 10% of AGI for borrowers earning $100,000 a year or more.

What does any of that actually mean?

Monthly payments for many borrowers would be lower relative to Obama-era income-driven repayment plans, according to multiple experts. Though, it would require a minimum monthly payment of $10, ending the $0 payment option of previous income-driven plans.

This new $10 minimum payment wouldn't make a big difference to the government's coffers, says Jason Delisle at the Urban Institute. Instead, he says, the purpose likely stems from "emerging research that requiring people to make some payment each month is good because it keeps them connected to the loan and makes it less likely that they'll default."

But some borrower advocates worry this new minimum payment could have the opposite effect.

For the lowest-income borrowers, asking for $120 a year is "significant," says Roxanne Garza, director of higher education policy at the liberal-leaning EdTrust. "I think having that be a required minimum payment will likely push more borrowers into default."

The plan would also waive any interest that is left after a borrower makes their payment. 

If a borrower's monthly payment is $50 but they owe $75 a month in interest, the $50 would be applied to interest, and the remaining $25 of interest would be waived by the government.

The result: Borrowers would no longer see their loans grow.

In fact, Republicans want to make sure borrowers see their balances go down every month.

Using our previous example, of a borrower who pays $50 a month entirely toward interest, this provision would also have the government knocking $50 a month off their principal.

For borrowers whose monthly payments are less than $50, the government would match whatever they do pay and apply it toward the principal.

Borrowers whose monthly payments already reduce their principal balance by at least $50 would get no extra help from the government.

"It's a form of monthly loan forgiveness," Delisle says. "It's a drip drip drip of loan forgiveness, rather than waiting for the big payout at the end of 20 years."

While previous plans offered forgiveness after 20 or 25 years, this plan would extend that to 360 qualifying payments, or 30 years. Any qualifying payments borrowers made before this transition would count toward satisfying that requirement.

This drip-drip change is a way of encouraging borrowers, says Beth Akers at the conservative-leaning American Enterprise Institute. When people make payments but don't see their balances go down, "we know [they] get tremendously discouraged." This new principal payment, Akers says, "really tends to that emotional need borrowers have" to feel like they're making progress.

In creating the Repayment Assistance Plan, Republicans would also eliminate President Biden's legally frozen SAVE Plan.

Delisle says the borrowers who will feel the biggest difference between this plan and previous income-driven plans are those with large amounts of graduate school debt. These borrowers average more than $110,000 in debt, and under older plans, they could make relatively low monthly payments while keeping a patient eye on forgiveness.

Under this new plan, Delisle says, graduate school borrowers (who tend to earn more income than undergraduate borrowers) would end up paying more upfront, and, delaying total forgiveness for 30 years instead of 20 or 25 means most would likely pay off their debts first.

Finally, borrowers should know: If they enroll in this plan, they cannot change plans later.

"It's a roach motel," Delisle says. "You go in, and you can never check out."

3. Extra options for current borrowers

The first two options will be the only ones available to borrowers who take out loans after July 1, 2026. But current borrowers have a few more choices – and may feel a little confused.

Current borrowers will still have access to several older plans, including the current standard plan. They'll also get access to a version of the old Income-Based Repayment (IBR) plan (new borrowers will not). That's right. Unlike future borrowers, current borrowers will get to choose between two different income-driven plans:

The new Repayment Assistance Plan and IBR.

What's the difference? Well, we've already covered the former. Under the latter, IBR:

• Borrowers' payments would be based on 15% of their discretionary income.
• The repayment window would be shorter: 20 and 25 years for undergraduate and graduate borrowers, respectively.

Compared to Biden's SAVE Plan, borrowers' "payments would be much higher," says Roxanne Garza, of EdTrust.

The SAVE Plan based monthly payments on 5% of an undergraduate borrower's discretionary income, Garza explains. Under this IBR plan, monthly payments would be based on 15% of discretionary income. That would mean considerably higher payments.

Delisle says, most lower- and middle-income borrowers would likely have lower monthly payments on the new Repayment Assistance Plan compared to IBR.

The one reason borrowers with older loans might want to enroll in IBR anyway is if they've been in repayment for close to 20 or 25 years, and are approaching forgiveness, Delisle says.

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