Summary

• Biden Administration has a new plan to tackle student debt crisis alongside its main initiative of forgiving $20,000 per borrower.
• Plan B focuses on overhauling income-driven repayment plans (IDRs) to make them more manageable for borrowers and address negative amortization issue.
• Plan B will simplify and enhance the Revised Pay As You Earn (REPAYE) program, increasing protected income and reducing percentage of income to repay.

The Biden administration is pushing forward with another approach to tackling the student debt crisis while its main initiative, a plan to forgive up to $20,000 in student loans per borrower, remains mired in legal limbo.

Even though the debt-forgiveness effort may be struck down by the courts, the Department of Education's Plan B, could help millions of borrowers by overhauling income-driven repayment plans (IDRs). The IDRs are designed to help make student loans more manageable by pegging a person's monthly payment to their income. However, they have been criticized for allowing student debt to grow through negative amortization, or when a person's loan balance keeps growing despite their consistently making payments.

The plan to reform IDRs was first announced in August but was overshadowed by the Biden administration's blueprint for forgiving up to $20,000 in debt per borrower. But with the debt-relief program stopped in its tracks by legal challenges, the Education Department said it is moving forward with the other part of its plan, which will overhaul IDRs with the goal of helping lower- and middle-income borrowers. The IDR overhaul "is hugely important," Persis Yu, deputy executive director of the Student Borrower Protection Center (SBPC), an advocacy group for people with student debt, said. "We see so many borrowers say, 'I don't get it — I took out $15,000 and now I owe $40,000,' which is emotionally demoralizing and financially devastating. IDRs "worked in a really toxic way before," she said.

The Biden Administration plans to mostly eliminate three of the IDR plans and focus on one program, Revised Pay As You Earn (REPAYE), that it intends to simplify and make more generous. Under the proposed regulation changes, REPAYE will increase the amount of income that is protected from debt repayment. Currently, enrollees must make payments equal to 10% of their discretionary income, which is set at earnings above 150% of the federal poverty guidelines.

That means only $20,400 of income for a single borrower is considered non-discretionary and therefore protected from IDR plans. The proposal would boost the amount of non-discretionary income for single borrowers to about $31,000, or 225% of the federal poverty threshold. This will provide more money for necessities such as rent or food.

In addition to that the proposal will also halve the percentage of discretionary income that borrowers must repay, with the share declining to 5% from 10% currently. This will give more leniency to the borrowers who will have to repay less. And the proposal would eliminate the issue of negative amortization by capping the amount of unpaid interest that could be added to a borrower's loan balance.

In conclusion, the Biden Administration's Plan B, despite not being as ambitious as the initial proposal, is still important as it addresses the major issues of IDRs, that have made the student debt problem even worse, the negative amortization which make the loan balance to keep increasing even after consistent payments are made. This new plan to overhaul IDRs will help millions of borrowers to make their loans more manageable and give them a more feasible path towards repaying their loans.