forgiveness and support for students and borrowers, in the Roosevelt Room of the White House in … [+]
The Biden administration has officially brought back two previously-phased out student loan repayment plan options. This gives borrowers new paths to reduce monthly payments and pursue student loan forgiveness through income-driven repayment programs and Public Service Loan Forgiveness.
Applications officially reopened on Wednesday, according to an Education Department announcement. Here’s what borrowers need to know.
ICR And PAYE Plans Offer Additional Routes To Student Loan Forgiveness
Under current law, all income-driven repayment plans can lead to eventual loan forgiveness, typically after 20 or 25 years. But the SAVE plan, one of the Biden administration’s key student debt relief initiatives, has been blocked due to legal challenges. And as part of the prior implementation of SAVE, the Education Department phased out new enrollments in two other IDR plans: the Income-Contingent Repayment plan and Pay As You Earn, leaving Income-Based Repayment as the only alternative IDR option.
But with the SAVE plan on life support and likely to get overturned or repealed in the coming months, the Biden administration has brought back the ICR and PAYE plans to give borrowers more options to pursue lower payments and loan forgiveness. The reopening of these plans also provides borrowers pursuing Public Service Loan Forgiveness, or PSLF, with more options as well. Most borrowers seeking loan forgiveness under the PSLF program must also be in an IDR plan.
“The Department continues to defend in court the authority to cut payments for borrowers with high debts and low incomes through the SAVE Plan,” said U.S. Under Secretary of Education James Kvaal in a statement on Wednesday. “In the meantime, we are making more options available to low-income borrowers, teachers, servicemembers, and other public servants so they can make the best choices for their financial situation.”
What Borrowers Should Know About Student Loan Forgiveness Under ICR And PAYE Plans
IDR describes a category of repayment plan where borrowers can repay their student loans based on their income, with eventual student loan forgiveness after a set time in repayment if they do not repay their balance in full. The ICR and PAYE plans are IDR plans, just like the IBR and SAVE plans. But each plan was created at different times, and they offer different benefits.
“PAYE and ICR plans were initially established in 2012 and 1996, respectively,” explained the Education Department in its announcement on Wednesday. “The Department closed the PAYE and ICR plans to most new enrollments last summer because the Biden-Harris Administration’s SAVE Plan offered lower or the same payments and other benefits. However, a series of court rulings in lawsuits waged by elected officials have suddenly changed the terms of student loan repayment, affecting millions of borrowers.” As a result, the department took steps in November to start the process of reopening access to ICR and PAYE.
Each IDR plan is a bit different in terms of the borrowers who are eligible, the formula that is used to calculate monthly payments, and the length of the repayment term. IBR has a 25-year loan forgiveness term for most borrowers, and a 20-year term for borrowers who first took out federal student loans after July 1, 2014. ICR has a 25-year repayment term for most borrowers, while PAYE has a 20-year repayment term and a more favorable repayment formula that typically will provide more affordable payments than ICR or the older version of the IBR plan. But PAYE also has disbursement date restrictions based on when a borrower first took on their loans.
“PAYE offers the lowest payments to most borrowers. Borrowers make no payments on the first $22,590 of income for single individuals ($46,800 for a family of four) and 10 percent of income above those amounts,” explained the department in its announcement. “ICR provides $0 payments for single individuals earning up to $15,060 ($31,200 for a family of four) and 20 percent of income above that amount. It also has an alternative payment formula that may result in lower payments for borrowers whose loan debt is low relative to their income.”
Borrowers should be aware, however, that student loan forgiveness at 20- and 25-years under the PAYE and ICR plans is currently being reviewed by the 8th Circuit Court of Appeals, so its future is uncertain.
How To Apply For ICR And PAYE To Pursue Student Loan Forgiveness And Lower Payments
Borrowers can use the normal IDR application process to apply for ICR or PAYE, or switch over from other IDR plans such as the SAVE plan.
“The PAYE and ICR applications are available at StudentAid.gov/idr,” said the department. “To apply, borrowers will log in to their StudentAid.gov account and upload income information, such as a tax return.” The department indicates that the ICR and PAYE applications will be available until July 1, 2027.
Because the IDR processing system was shut down for months following the 8th Circuit’s court order blocking the SAVE plan in August, the Education Department warns borrowers to expect lengthy processing delays for any IDR application.
“In the coming weeks, the Department expects servicers to begin processing certain IDR applications that were paused following court orders affecting the terms and availability of IDR plans,” says updated department guidance. “Specifically, the Department will begin processing borrower’s applications to enroll in IBR, ICR. PAYE. Servicers will also process applications for recalculations for IBR, ICR, and PAYE. Servicers will have applications in the queue that will take some time to work through. Processing for SAVE (formerly known as REPAYE) applications and applications where borrowers checked ‘lowest monthly payment’ will remain paused.”
According to Wednesday’s statement, “Once their servicer enrolls them in the new repayment plan, payments will be due, interest will accrue, and the payments will provide credit toward PSLF and IDR,” says the department. “If servicers need additional time to process a borrower’s PAYE or ICR application, the servicer will place the borrower in a processing forbearance for up to 60 days, during which time no payments are due, interest accrues, and the time will count toward PSLF and IDR forgiveness.”
However, many borrowers are indicating that at least some loan servicers are still not processing IDR applications at all, or are not putting borrowers into a processing forbearance that should count toward student loan forgiveness under IDR and PSLF. Impacted borrowers can submit a complaint to the Department of Education in those circumstances.