On Aug. 24, the Department of Education announced a multifaceted plan to provide student debt relief. The plan would extend the current pause on federal student loan payments, interest, and collections through Dec. 31 [refer to Washington Highlights, Jan. 7], and provide targeted federal student loan debt cancellation. Additionally, the department announced a forthcoming proposed rule to create a new income-driven repayment plan.
According to the announcement, federal loan borrowers should expect to resume repayment beginning in January 2023, noting that “pandemic-related relief should be phased out responsibly so that people do not suffer unnecessary financial harm.”
The one-time debt cancellation measures will forgive $10,000 for individuals earning under $125,000 per year ($250,000 for joint tax filers) and up to $20,000 for current and former Pell Grant recipients. Most medical students and residents should be eligible provided their federal loans were disbursed on or before June 30. The department indicated it will be announcing further details on how borrowers can take advantage of these measures in the coming weeks and that an application will be available in early October.
The department estimates that nearly 8 million borrowers may be eligible to receive relief automatically based on available income data and that the agency is also making available a legal memorandum regarding its use of executive authority for these discharges.
According to a White House fact sheet on student debt relief, the new income-driven repayment plan would:
- Reduce monthly repayment on undergraduate loans from 10% to 5% of discretionary income (with a weighted average for borrowers who also have graduate or professional school loans).
- Raise the amount of income that is considered nondiscretionary income and therefore is protected from repayment to 225% of the federal poverty level.
- Cover borrowers’ unpaid monthly interest, so that unlike other existing income-driven repayment plans, no borrower’s loan balance will grow as long as they make their monthly payments — even when that monthly payment is $0 because their income is low.
Additional details of the plan will be available when the proposed rule is published this fall.