NerdWallet: Here are details on how the new student loan repayment plans will work

by | Aug 29, 2022 | Stock Market

This article is reprinted by permission from NerdWallet.  This week, all eyes were on student loan cancellation news. And that makes sense: Borrowers waited months for the president to make a decision on his campaign promise to cancel at least $10,000 in student loan debt.

But tucked in the details around cancellation was something you might have missed — a new income-driven repayment, or IDR, plan that may cut monthly payments by half or more without the threat of a ballooning balance. Experts note that this change is likely to benefit women and borrowers of color most. “It’s the type of equity-rich action that I’ve never seen any other administration take on any other item,” says Lodriguez Murray, senior vice president of public policy and government affairs with the United Negro College Fund. Also see: The fate of student-loan forgiveness may rest with the courtsHow existing income-driven repayment plans work Under existing income-driven plans, unpaid interest grows over time and, after certain qualifying events, is added to the borrower’s balance with penalties. Borrowers who take a month of forbearance — say they lose their job and need to skip a payment — see not only the skipped payment added back to their principal, but also every penny of interest that accumulated over the years. That interest accrual is the key trigger that can lead to balances many times larger than the original debt, even after decades of payments. “Current IDR programs are not optimal from the borrower perspective,” says Daniel Collier, a University of Memphis assistant professor whose research focuses on student loan debt and income-driven repayment and tuition-free policy. “It seems like people are still massively struggling even being enrolled in IDR.” The Biden administration acknowledges existing IDR programs are “too complex and too limited.” However, borrowers who use the new plan won’t see their balances grow, as long as they make their reduced monthly payments. That, Collier says, makes the IDR changes among the most impactful aspects of the cancellation announcement. Here’s what current and future borrowers need to know about the new plan.The new income-driven repayment planAll enrollees will pay less The amount you pay each month on an income-driven repayment plan is based …

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