A student loan program proposed by the Biden administration on Wednesday appears to be linked to its larger campaign for a $15 per hour minimum wage nationwide.
The White House unveiled a long-awaited plan to prolong a payment moratorium through the end of 2022 and eliminate up to $20,000 in federal student debt for borrowers.
But adjustments to “income-driven repayment plans” were concealed inside the larger bundle of policy improvements. For low-income borrowers, these programs can make monthly payments more manageable.
An adjustment to the concept of “non-discretionary” income was one of those changes that the administration connected to a $15 minimum wage.
There should be a $15 minimum wage across the country, according to President Biden and many Democrats. The program was dropped as a result of discussions over a social expenditure package in 2021, and it still lacks the support needed to pass in Congress. In January, Biden signed an executive order mandating a $15 minimum wage for all federal employees and contractors.
Since 2009, the federal minimum wage has stayed constant at $7.25 per hour.
“It’s another way of continuing to push the idea that $15 should be the minimum wage,” the new policy, according to Abigail Seldin, CEO of the Seldin/Haring-Smith Foundation.
Seldin has previously run for the Biden administration’s position of student loan administrator.
Requests for response from the White House and the U.S. Department of Education went unanswered.
How a $15 minimum wage relates to student loan debt
Non-discretionary income is essentially what a household uses to pay for necessities like rent, a mortgage, and food.
The government safeguards the non-discretionary income of borrowers in income-driven programmes by exempting it from repayment. The sum is determined by the household’s annual income in comparison to the federal poverty level.
A borrower is currently eligible for a loan with a $0 monthly payment if their income is less than 150% of the federal poverty threshold. That works out to around $20,385 before taxes for a single person in 2022, or $9.80 an hour for a full-time employee.
That amount was increased by President Biden to 225% of the federal poverty level, or roughly $30,577.50 per year, or $14.70 per hour.
The contract ensures that “no borrower earning under 225% of the federal poverty level — about the annual equivalent of a $15 minimum wage for a single borrower — will have to make a monthly payment,” the U.S. Department of Education claims.
Student loan experts believe that because of the regulation, which is applicable to undergraduate student loans, more borrowers in income-driven programs would be eligible for a $0 monthly payment or would have a lesser monthly cost to pay.
“These changes make things more affordable for borrowers and allow borrowers to avoid default,” according to senior policy counsel at the Center for Responsible Lending Whitney Barkley-Denney.
Additional modifications to income-driven repayment arrangements
Other changes to income-driven schemes were also announced at the same time by the administration.
All of the actions are not yet final. According to a statement released on Wednesday, the Education Department will propose regulations “in the coming days.” After the public has had a chance to comment on the proposal for 30 days, the Department will use those comments to create the final rule, which may or may not be identical to the proposal.
The monthly payment cap for borrowers would be set at 5% of income, which is half of the existing 10% maximum, in addition to the higher “non-discretionary” income criterion.
For a one-person home, Barkley-Denney provided the following illustration of how this would operate:
Let’s assume that in 2022 the borrower will earn $60,000 per year. The first $30,577.50 would be exempted from repayment since, as was said above, it would be deemed “non-discretionary.” The borrower’s monthly payment would be determined by using the remaining $29,422.50, which would be “discretionary.”
Under the proposed regulations, those contributions would be capped to 5% of discretionary income, or $123 per month as opposed to $245 per month under the current 10% cap.
Additionally, after 10 years of recurrent payments (even if they total $0 per month), borrowers with initial loan balances of $12,000 or less would have their debt forgiven. Right now, that timescale is 20 years.
Additionally, borrowers’ balances won’t increase if they consistently make monthly payments, in contrast to the situation with the existing income-driven repayment programs.
According to experts, if these recommendations are adopted as written, the revisions would be significant since they would become a part of the student loan system permanently.
“This is a systemic change,” Seldin said. “Debt forgiveness might be a one-time move.”