How Student Loans Are Changing, Regardless of the Supreme Court Ruling | WSJ
Understanding Student Loan Repayment Plans
This video explains how student loan repayment plans work and the challenges that borrowers face when repaying their loans. It also discusses President Biden's plan to change the current system.
James and Mary's Loan Repayment Plans
- James graduated with $30,000 in student loan debt and pays a 5% interest rate. His payment plan allows him to be debt-free in 10 years.
- Mary took out the same loan as James but has a lower income, so she went onto an income-based repayment plan which lowered her monthly payment to around $68 a month. However, with amortization, she still owes $125 the first month since it's the same loan as James, but Mary's monthly payment is less than that, meaning there's nothing to go towards the loan's principle and her balance owed goes up.
Challenges of Income-Based Repayment Plans
- Income-driven repayment programs are set up to only last 20 or 25 years. So in theory, people like Mary will have paid $16,000 after two decades and her then $53,000 balance would be forgiven but a government report found that of all the borrowers at that stage, only 11% would be eligible for forgiveness.
- If they miss one payment or fail to submit their income recertification information every year or if there was some data issue where a payment did not get recorded properly then they become unenrolled in the program. If that happened to Mary, she would be on the hook for her entire balance with all that built-up interest.
President Biden's Plan
- Under President Biden’s new system any interest accrued while on an income-driven repayment plan would be forgiven, so payments would go directly to the loan's principle instead of just interest.
- The new plan also changes the rules around who qualifies and lowers their monthly payments. Mary, with her $30,000 a year salary, would likely have no monthly payment.
Biden's Student Loan Forgiveness Plan
This section discusses President Biden's student loan forgiveness plan and how it will affect borrowers.
Changes to Loan Repayment
- Borrowers, whether for community college or a four-year college, will have to pay more than 5% of their discretionary income to repay their loan.
- This proposal shifts the boundaries between what counts as a loan and what counts as a grant.
Executive Action Basis
- President Biden felt that he needed to move forward on an executive action basis or through using powers that were available to him under existing law because nothing was getting done in Congress on this issue.
- These changes go into effect in July regardless of how the Supreme Court rolls on debt forgiveness.
Criticisms and Costs
- Forgiveness would cost the US nearly $500 billion over the next 10 years, while changes to income-driven repayment would cost $141 billion or more as more borrowers take advantage of the program.
- Forgiveness is criticized as solving a problem for the past without creating a future solution.
Future Solutions
- The plan looks to change the way student loans are handled going forward so that students don't end up owing more than they can afford for their degrees.