Big changes for income-based reimbursement, and more may be on the way

The Biden administration recently made temporary but impactful changes to income-based repayment programs for federal student loans. And even bigger reforms to those repayment plans could be on the way. Here’s what you need to know.

Income-Based Repayment for Federal Student Loans: How They Work

Income-contingent repayment (IDR) is a federal student loan repayment category that outlines several specific plans. Income-Based Reimbursement (IBR) is one such IDR plan, although the terms IDR and IBR are sometimes used interchangeably.

Each IDR plan, although somewhat different in terms of eligibility requirements and payment formulas, offers borrowers a monthly payment tied to their family size and income (usually their adjusted gross income as listed on their federal income tax return).

Under normal circumstances, borrowers repaying their student under an IDR program must recertify their income (effectively reapplying for the plan, just with updated income information) every 12 months. This results in a recalculation of payments based on this updated income documentation, which is usually the borrower‘s latest federal tax return. After 20 or 25 years of repayment, depending on the specific IDR plan, any remaining balance is forfeited. However, this form of student loan forgiveness could be considered taxable income for the borrower.

New temporary flexibilities for student loan borrowers in income-driven repayment plans

In response to the Covid-19 pandemic and the ongoing pause on most federal student loan payments and interest, the Department of Education has indicated that it will extend normal income recertification deadlines for borrowers in an IDR plan. However, following President Biden’s recent extension of the payment pause by an additional four months to August 31, 2022, the Department has further extended these deadlines.

According to the ministry, “you will not be required to recertify [your income for an IDR plan] before payments restart, and the earliest you might be required to recertify is March 2023.” That’s almost a year away. And that means some borrowers who last recertified their income in 2019 may end up waiting four or more years before having to update their income information.

The Biden administration is also temporarily allowing borrowers to self-report their income if they want to recertify early and update their payment amount, rather than providing documents like a tax return or pay stub. This can be important for borrowers who have experienced a reduction in income since their last recertification.

According to the ministry, “while all of your loans are direct loans, you can now self-report your income when you apply for or recertify for an IDR plan. This means that you can report your income without having to submit tax documentation. The option is now available through February 28, 2023 following Biden’s latest payment pause extension. Borrowers can apply through the online IDR application at StudentAid.gov.

Biden seeks to eliminate student loan forgiveness tax associated with IDR plans

Each time a debt is reduced, canceled or canceled, the borrower may have to pay taxes on the canceled balance. Federal law may create exceptions to this tax event. For example, student loan forgiveness under the Public Service Loan Forgiveness Program (PSLF) is tax exempt under federal law.

But student loan forgiveness under IDR plans can be considered a taxable event. This can have huge implications for student borrowers, especially since many borrowers on IDR plans may not have payments high enough to cover monthly interest accumulation, resulting in runaway balance growth.

The American Rescue Act — the stimulus bill that President Biden signed into law last year — exempts all federal student loan forgiveness from tax, including loan forgiveness under IDR plans. But this relief is temporary, and it should go down in December 2025.

However, last month Biden included a proposal in his budget plan that would permanently eliminate federal taxation on student loan forgiveness, including IDR student loan forgiveness. The proposal would need to pass both the House and the Senate to become law, so its future is far from certain. But if passed, it would bring huge relief to millions of borrowers repaying their loans under IDR plans.

Is an IDR waiver the next big student loan relief initiative?

Consumer advocates and student borrowers are increasingly drawing attention to the widespread problems with IDR programs. A bombshell NPR report released earlier this month suggested that loan servicers were not tracking borrowers’ progress toward their 20- or 25-year IDR repayment terms, raising serious doubts about the ability of the Department of Education to administer these programs and provide any student loan forgiveness to which borrowers are entitled under federal law.

Supporters have urged the Biden administration to create a new so-called “IDR Waiver” – a temporary relief program that will allow borrowers in IDR plans to get retroactive credit for loan forgiveness, and possibly obtain the complete cancellation of their loans. The program would be akin to the ongoing limited PSLF waiver, which the Biden administration signed into law last October to correct similar shortcomings in the PSLF program; so far, more than $5 billion in student loan forgiveness has been issued to tens of thousands of borrowers, according to the Department.

In February, a broad coalition of student loan advocacy groups called on the Biden administration to create an IDR waiver. Features would include automatic, retroactive counting of all months since the borrower began repaying as months eligible for student loan cancellation under IDR plans, including deferment, forbearance, and of default.

The administration has not officially responded to calls for an IDR waiver. Notably, however, the administration established the limited PSLF waiver, along with major reforms to the Total and Permanent Disability Discharge (TPD) program, following similar coordinated outreach by borrower advocacy organizations.

A new IDR plan is in the works, which could lead to more student loan forgiveness

The Department of Education is currently working on creating a new IDR plan. Federal law allows a presidential administration to write regulations establishing an income-contingent repayment plan, and it gives the Department of Education broad discretion to set key elements of that plan — including the repayment formula. repayment and the number of years of repayment before loan forgiveness is effective. . Under this regulatory authority, the Biden administration could create a new IDR plan that has lower monthly payments and a shorter repayment term than is currently offered to borrowers. This could bring many borrowers closer to loan forgiveness.

The Department is currently using this process to develop the details of a new IDR plan. Last year, it released a draft proposal for a program it calls Expanded Income Contingent Reimbursement (EICR). However, the EICR has been widely criticized by advocacy groups and stakeholders involved in the regulatory overhaul process, particularly given its complex two-tier payment formula and exclusion of Parent PLUS borrowers. and college borrowers. The ministry is continuing to work on an alternative proposal – but so far officials have not released any details. A new IDR plan, if finally created, could be offered to borrowers as early as next year.

Further Reading on Student Loans

Will student loan repayments really resume? Probably Not For A While – Here’s Why

Forgiveness of student loans through executive action still on the table, says top Biden official

4 options for Biden to legally enact student loan forgiveness without Congress

Biden formally extends student loan payment suspension, promises ‘additional flexibilities’ for borrowers