MarketWatch: Debt cancellation got all the attention, but this Biden proposal could impact student-loan borrowers more, critics and advocates say
September 29, 2022
“When President Joe Biden announced in August that his administration planned to cancel $10,000 in federal student debt for most borrowers, Allison Daurio felt some relief.
Under the White House’s debt forgiveness plan, Daurio , 29 would see about one-quarter of her student loan balance wiped away. But as she read more closely through the proposal, Daurio realized that another detail would likely have a bigger impact on her life: the Biden administration’s plan to make sweeping changes to the way borrowers repay their student loans.
‘I felt that was a bigger story,’ Daurio said of the proposed reforms. Student-loan policy experts — both supporters and detractors of the Biden administration’s debt relief initiative — also believe that the White House’s proposed new income-driven repayment plan, known as IDR, could reshape the student loan system. Officials haven’t released the details of their proposed changes to the government program that allows student-loan borrowers to pay back their debt as a percentage of their income. But if the pieces of the plan officials have already outlined come to fruition, it could radically change the experience of repaying student loans for millions of borrowers. Senator Elizabeth Warren, a Democrat of Massachusetts, called the plan ‘potentially transformative,’ in a September speech to student-loan borrower advocates. ‘This is not just about can we get the president to do a one time cancellation,’ Warren said. ‘This is about how we reform how we think about paying for post-high school education.’ Income-driven repayment is a decades-old feature of the student loan system, but in August, the Biden administration pitched a new version of the repayment scheme. The government first offered the payment scheme as an option on some federal student loans in the early 1990s in order to create a safety net for borrowers who, because they graduated in a recession or faced an unexpected or temporary crisis, couldn’t afford to repay their debt in a standard mortgage-style plan. The idea was to grant an alternative to fixed monthly payments that are based on loan size. Under the current income-driven repayment plans, borrowers pay back their loans as a percentage of their income and then have the remaining balance canceled after 20 or 25 years. In the decades since policymakers developed the program, they’ve added more versions of the plan, typically in an effort to make it more generous, and a growing share of borrowers — 47%, according to a 2022 report from the Government Accountability Office — pay back their loans as a percentage of income, indicating that IDR has become less of an insurance policy and more of a typical way borrowers manage their debt amid rising college costs and slow wage growth. Still, borrowers and advocates have complained that the program doesn’t adequately address borrowers’ challenges repaying their debt because they can face obstacles getting into and staying on the plans, the payments can still be too expensive because too little of the borrower’s income is protected, and borrowers’ whose payments only cover some of the interest watch their balances grow and grow. Without the final language, it’s hard to say exactly how far the Biden Administration’s proposed changes to income-driven repayment will go in addressing advocates’ concerns. But based on details released in press materials, they’re hopeful that it could provide a fix to some of the biggest challenges borrowers using IDR face. If implemented, the plan could be ‘super helpful’ psychologically to borrowers by mitigating some of the ‘the distress, the things that also weigh on people’s decisions in their everyday lives,’ said Daniel A. Collier, an assistant professor at the University of Memphis who studies income-driven repayment. Meanwhile, the proposal is also likely to provide fuel for critics who have charged that income-driven repayment is too costly to taxpayers.