There are approximately 43 million Americans with federal student loans.
After the passage of the CARES Act, many of those borrowers qualified for a pause in payments and interest accumulation. But even with this relief being extended until mid-2023, all federal student loan borrowers will soon be required to resume making monthly payments.
With this potential monster of a bill creeping towards your budget, it is important to explore all of the options at your disposal. And one of those options could be a new income-driven repayment (IDR) plan that's been proposed by the Department of Education.
The name of the new plan would be Expanded Income-Contingent Repayment, or EICR. Let’s explore what EICR could be and how the availability of this new plan could impact your student loans.
Editor's Note: The Department of Education recently announced that the new student loan repayment plan would modify REPAYE, not ICR. As a result, some are calling it Modified REPAYE. However, all rules appear to be the same as below.
What Are Income-Driven Repayment Plans?
First things first, let’s discuss what an income-driven repayment (IDR) plan is. IDR plans are only available for federal student loan and cap borrowers' monthly payments to a certain percentage of their discretionary income. Currently, there are four IDR options:
The repayment period on the existing plans are either 20 or 25 years. And with each of them, any balance that's remaining at the end of the repayment period is forgiven. But unlike with PSLF forgiveness, you may have to pay federal income taxes on the forgiveness you receive after completing an IDR plan.
What Is Expanded Income-Contingent Repayment?
In late 2021, the Education Department unveiled a new repayment plan — the Expanded Income-Contingent Repayment plan, otherwise known as the EICR plan. It's important to note that this plan is currently a proposal.
Although the details aren’t set in stone yet, the proposal called for a new option to provide a lifeline to student loan borrowers struggling with their payments. Here’s what we know so far.
Many student loan borrowers who qualify for EICR will find reduced payment burdens. In the plan's current form, here's how much you'd pay depending on your discretionary income:
≤ 200% of the federal poverty line
200% to 300% of the federal poverty line
> 300% of the federal poverty line
This "marginal" approach to calculating payments, which is similar to how the IRS tax brackets are structured, would be something completely new for a federal IDR plan. All four existing plans base payments on 10%, 15%, or 20% of discretionary income across the board.
So, for example, let's say that you're currently on the PAYE plan and your discretionary income is below the poverty line exclusion. In this case, you should be eligible for $0 payments. But once your discretionary income rises above the poverty exclusion (even if it's only by a few dollars), you'll be required to start making the full 10% payments. But with Expanded Income-Contingent (EICR), you'd have a 5% bracket in between that would allow you to ease in to making payments and minimize the initial shock to your budget.
The poverty exclusion of 200% of the federal poverty line is also more generous than all currently-available plans. Right now, borrowers are required to make monthly payments whenever their discretionary income reaches at least 150% of the federal poverty line.
Related: Capitalized Interest rules may also be changing for this new repayment plan.
As of now, the only loans eligible for EICR are undergraduate loans. These loans can include Direct Subsidized Loans, Direct Unsubsidized Loans, and Direct Consolidation Loans that you received as an undergraduate.
Importantly, this means that graduate school loans and Parent PLUS loans would not eligible for Expanded Income-Contingent Repayment (EICR). This would be a huge bummer for the millions of borrowers who took out loans during graduate school and who tend to be the one's saddled with the largest amounts of student debt.
Many student loan pundits have also long been begging for the Education Department to offer more income-driven repayment (IDR) options for parents. Right now, Income-Contingent Repayment (ICR) is the only plan that Parent Plus borrowers can become eligible to join. And of the four plans, ICR bases payments on the highest percentage of discretionary income - 20%.
Unfortunately, it doesn't appear that EICR will be providing any relief to Parent Plus borrowers. What's more it could become the only of the IDR plans that will not allow graduate loan borrowers to join.
As it stands, EICR will offer student borrowers loan forgiveness after they've made payments for at least 20 years. As of now, the details of the plan do not indicate if the forgiven amount would be considered taxable income in the eyes of the IRS.
Could This Impact Your Student Loans?
The proposed Expanded Income-Contingent Repayment plan is not yet finalized. But as soon as the Department of Education sorts out the details, EICR could absolutely impact your student loan repayment options.
For now, you may want to see where your discretionary income falls against the federal poverty line for your family size. If you find that your income may allow you to qualify for EICR, then keep an eye on the Department of Education for any new information about these impending changes.
The U.S. Department of Education may finalize the Expanded Income-Contingent Repayment in 2022. If that happens, it could be perfect timing as federal student loan borrowers are expected to resume making payments later this year. For those who qualify, the EICR plan could offer a new safety net for tight budgets.
Robert Farrington is America’s Millennial Money Expert® and America’s Student Loan Debt Expert™, and the founder of The College Investor, a personal finance site dedicated to helping millennials escape student loan debt to start investing and building wealth for the future. You can learn more about him on the About Page, or on his personal site RobertFarrington.com.
He regularly writes about investing, student loan debt, and general personal finance topics geared towards anyone wanting to earn more, get out of debt, and start building wealth for the future.
He has been quoted in major publications including the New York Times, Washington Post, Fox, ABC, NBC, and more. He is also a regular contributor to Forbes.
Editor: Clint Proctor Reviewed by: Claire Tak