As a candidate, Joe Biden promised a brand new federal repayment plan to help borrowers. As President, Joe Biden has started the process of creating a new repayment plan.
Unfortuantely, things already look quite bad for the new repayment plan.
If there is good news, it is the fact that the details so far are limited and subject to change.
Meet Expanded Income-Contingent Repayment
Let’s hope this name is a placeholder.
It might seem petty to complain about the name, but this detail matters.
One of the biggest hurdles for borrowers in repayment is the complicated rules. More repayment plan options mean more confusion.
Think about the plans we currently have: Income-Contingent Repayment, Income-Based Repayment, Pay As You Earn, Revised Pay As You Earn, and Income-Based Repayment for New Borrowers.
These are all categorized as Income-Driven Repayment Plans. We have many names for payment plans that charge based on what a borrower earns, but it is impossible to determine any differences based on the name.
Adding yet another plan that sounds like all of the others will only further complicate things. The Department of Education should focus on making things less complicated.
EICR has no Apparent Relationship to the Income-Contingent Repayment Plan
Expanded Income-Contingent Repayment certainly sounds like it is related to Income-Contingent Repayment.
There is even a precedent for expanding repayment plans to help more borrowers. The Pay As You Earn (PAYE) plan was the first student loan repayment plan that only charged 10% of a borrower’s discretionary income each month. Previous income-driven plans charged 15% or 20%. However, only “eligible new borrowers” qualified. When a new plan was created to expand the number of borrowers who qualified for 10% payments, it was called Revised Pay As You Earn (REPAYE).
Income-Contingent Repayment (ICR) is the original income-driven repayment plan. How does Expanded Income-Contingent Repayment expand things? It isn’t clear.
Is there any relationship between Expanded Income Contingent Repayment and the original ICR plan? Based upon the information publicly available, no such relationship exists.
The Substance of Expanded Income-Contingent Repayment
Setting aside the superficial complaints about the name, the substance of the plan is lacking as well.
At this stage, EICR doesn’t look like much of an upgrade over the other repayment plans:
- Forgiveness doesn’t happen any earlier. LIke the other IDR plans, loan forgiveness will still take 20 to 25 years.
- The marriage penalty still exists. All federal repayment plans charge a marriage penalty of some sort. In the latest draft, spousal income is still used to determine EIRC payments.
The big question to be determined is whether or not EICR will charge less than 10% of a borrower’s discretionary income. Candidate Joe Biden called for a plan that charged 5%, which could mean dramatically reduced monthly payments for many borrowers. The exact percentage charged is still in discussion.
Watch for interest subsidy developments: The REPAYE plan was the first plan to help borrowers with interest when their monthly interest was more than the monthly bill.
EICR could potentially match or exceed the REPAYE subsidy.
How EICR Could Further Complicate Things
One idea being discussed would potentially make EICR the most complicated federal repayment plan.
At present, all income-driven repayment plans use a similar process for calculating payments: Determine a borrower’s monthly discretionary income and then charge a fixed percent.
Rulemakers are exploring the possibility of a tiered system. Instead of a fixed percentage, borrowers at different income levels would be expected to pay varying amounts. This would make payment calculations look a bit more like the federal income tax code. The more a borrower earns, the higher percentage of their income they would be expected to pay.
If this rule went into effect, some borrowers would get the lowest payment by signing up for EICR, while others would be better off with a plan like REPAYE. It wouldn’t be apparent which plan was best without first doing some complicated math, including tax returns.
The more complicated the calculation, the harder it is for borrowers to double-check the work of their loan servicer. Given the lousy track record of some federal servicers, simplicity in calculations is an important consideration.
Improving Expanded Income Contingent Repayment
It might be a bit premature to critique a plan that doesn’t exist yet.
However, I’d argue that right now is a perfect time. Once things are set in stone, it is too late to make changes. Right now, we still have a chance for improvement.
For now, the best way to influence discussions is to contact your local lawmaker.
Once the proposed changes are open for public comment, I’ll post an updated link here for readers to leave feedback.