Biden's Newest Student Loan Proposal Would Allow Some Borrowers To Pay Back Only a Fraction of What They Owe

New changes to income-driven repayment plans announced Tuesday would essentially turn student loans into government grants.

Seemingly undeterred by the multiple recent defeats of his student loan forgiveness plan in federal courts, President Joe Biden has unveiled another program designed to lower the burden of student loan costs—this time, attempting to turn federal student loans into glorified grants, a shift that is likely to result in a further acceleration of ever-increasing college costs.

In August, Biden announced a sweeping loan forgiveness proposal which, in addition to promising to forgive thousands of dollars in loans for over 20 million eligible Americans, also contained a provision noting an intent to expand currently existing student loan forgiveness programs. One such program up for reform was "income-driven repayment" (IDR), a group of five plans that allowed participants to have their monthly payments topped at a set percentage of their "discretionary income"—adjusted gross income left over after subtracting a set percent of the federal poverty threshold. Under Biden's plan, the program would be changed to radically reduce the amount borrowers enrolled in IDR plans pay back.

On Tuesday, the Biden administration announced a full-fledged transformation of the IDR. The proposed 179-page regulation expands upon the planned changes to the IDR originally announced in August. Under the new program, which is set to be called REPAYE, the previous five IDR plans would be consolidated into one streamlined program.

Under REPAYE plans, borrowers would have their loans forgiven after just 10 years of payments—in comparison to the 20-year requirement for most current IDR plans. REPAYE would also halve the percentage of discretionary income forfeited toward student loan payments in comparison to most IDR plans—reducing the amount owed to only 5 percent for undergraduate loans. Further, the new program would expand the amount of income considered non-discretionary, rising to 225 percent of the federal poverty level—around $30,000—from 100 percent to 150 percent currently, depending on the specific plan used. The new program would also prevent borrowers' balances from growing as long as they make regular payments—even if those payments are too low to cover interest. However, the policy is not yet set in stone; the proposal is subject to a 30-day public comment period, after which the official regulation will be announced.

If successfully implemented, the new REPAYE program will practically turn federal student loans into grants, allowing students to borrow large amounts for college tuition and only pay a fraction of the amount owed before forgiveness. For example, under the new plan, a single borrower making $60,000 annually would be expected to pay a meager $1,475 a year in student loan bills—just $123 a month. Assuming the borrower's wage and marital status stayed the same for 10 years, this borrower would pay back only $14,750 of their undergraduate student loans—no matter how much they spent to attend college. As the Education Department wrote in a Tuesday press release, "Future cohorts of borrowers would see their total payments per dollar borrowed decrease by 40%. Borrowers with the lowest projected lifetime earnings would see payments that are 83% less."

Such a policy would incentivize destructive behavior from borrowers and colleges alike. Students—unlikely to ever face full repayment of a hefty student loan bill—would be unconcerned by the prospect of taking on large student loan balances, while colleges would continue to hike prices for students more than happy to pay with government money.

"Compared to other federal spending programs intended to reduce poverty or benefit children, broad debt relief programs are more costly and benefit more advantaged Americans," Adam Looney of the Brookings Institution wrote in September. "The amounts borrowers save (and eventually have forgiven) are based largely on the amounts students borrow, which means the benefits are uncapped and disproportionately flow to borrowers with the largest loans, who are more likely to be graduate students and students who attended more expensive programs."

While it is unclear whether this latest proposal will face legal pushback, the Biden administration's planned changes to IDR plans would radically change how college is paid for—turning student loans into essentially government grants. However, like the rest of Biden's student loan proposals, the main result would be more incentive for colleges to keep raising their prices—and for taxpayers to keep footing the bill.