- [Narrator] This is Chris.
No, wait. That's not average enough.
(keyboard clicking)
James. Okay, this is James.
He just graduated with a bachelor's degree
and $30,000 in student loan debt,
which is a rounded average amount
of what most graduates in the US end up with,
on which he pays a 5% interest rate,
which is again pretty average.
And this is Mary.
Mary also took out the exact same loan.
James's payment plan
allowed him to be debt free in 10 years
while Mary's repayment plan
meant that she ended up owing more money
after paying towards the loan for a decade.
The Supreme Court is about to decide
the fate of President Biden's plan
to forgive up to $20,000 in student debt, but.
- That is by no means the only big thing
that the Biden administration has done on student debt.
One of his other moves that was actually announced
the same day as mass debt cancellation
got much less attention,
but is arguably gonna make a much bigger difference
in the long run for student loan borrowers.
- [Narrator] The other big part of Biden's plan
will change how Mary, James,
and most other current and future borrowers
will repay their student loans.
Here's how. Let's start with James.
On this loan, his monthly payment would be $318,
and this is his payment schedule.
It's like a mortgage or car loan
where the interest essentially gets paid off first.
So his first month, James owes $125 in interest.
So the remaining $193 of his monthly payment
goes towards the loan's original amount, the principle,
which then lowers his total balance.
It's called amortization.
Each month, less of his monthly payment
goes towards interest and more towards the principle.
Those monthly payments make his total amount paid go up
and his balance owed go down until at the end of 10 years
he's paid off the loan paying $38,000 in total.
James's experience is what repayment looks like
for more than 40% of all student loan borrowers.
While he can afford those monthly payments
on his $60,000 a year salary,
that's too much for Mary who makes $30,000 a year.
So she did what nearly 40% of borrowers do
and went onto an income-based repayment plan
which lowered her monthly payment to around $68 a month.
But with amortization,
she still owes that $125 the first month
since it's the same loan as James,
but Mary's monthly payment is less than that,
meaning there's nothing to go towards the loan's principle
and her balance owed goes up.
Her monthly payments only go towards the interest,
which makes her total amount paid go up,
but also her balance.
At the end of 10 years,
Mary has paid $8,000 towards her student loans,
but she still owes more than $38,000.
This situation is a common one.
The exact number of Marys is unknown,
but a Pew survey found that two in five borrowers
owe more than they originally took out.
- I hear from people every single day
whose current balances,
even after they've been paying off their student loans
for 5, 10, 15 years,
are larger than the balance they started with.
- [Narrator] The income-driven repayment programs
are set up to only last 20 or 25 years.
So in theory, people like Mary
will have paid $16,000 after two decades
and her then $53,000 balance would be forgiven,
but a government report
found that of all the borrowers at that stage,
only 11% would be eligible for forgiveness.
- It shows how common it is
that so few people are able to complete these programs.
What's uncommon is successfully completing
the income-driven repayment program as it was designed.
That's what's uncommon.
- [Narrator] If they miss one payment,
they become unenrolled in the program.
- They could have not submitted
their income recertification information,
which is necessary every single year,
or there could have been some data issue
where a payment to a servicer did not get recorded properly
and as a result you are no longer eligible
to be part of this program.
- [Narrator] If that happened to Mary,
she would be on the hook for her entire balance
with all that built up interest.
Re-enrolling in the program is her only path
to earn forgiveness.
This is something President Biden's student loan plan
attempts to fix.
Under the new system, any interest Mary accrued
while on the income-driven repayment plan would be forgiven,
so her payments would go directly to the loan's principle
instead of just interest.
The new plan also changes the rules around who qualifies
and lowers their monthly payments.
Mary, with her $30,000 a year salary,
would likely have no monthly payment.
Even James would be eligible for a smaller monthly payment.
And dramatically, if someone, let's say Robert,
has $12,000 or less in undergraduate loans,
they would have their debt forgiven
after 10 years of small or sometimes zero dollar payments.
- No one with an undergraduate loan today or in the future,
whether for community college or a four year college,
will have to pay more than 5% of their discretionary income
to repay their loan.
- So this is really shifting the boundaries
between what counts as a loan and what counts as a grant.
This proposal probably goes farther
than President Biden intended to go,
at least while he was campaigning for president,
but that largely reflects the reality
that nothing was getting done in Congress on this issue
and he felt for political or economic reasons
or other reasons that he needed to move forward
on an executive action basis
or through using powers that were available to him
under existing law.
- [Narrator] Powers not everyone agrees
he should be able to use for this.
- Because President Biden
couldn't get his radical agenda through Congress,
he is dismantling the Federal Student Loan Program
and pushing Democrat's free college plan by executive fiat.
- [Narrator] These changes go into effect in July
regardless of how the Supreme Court
rolls on debt forgiveness.
This plan is also going to be expensive.
One report found that while forgiveness would cost the US
nearly $500 billion over the next 10 years,
the changes to income-driven repayment
would cost 141 billion or more
as more borrowers take advantage of the program.
While forgiveness is criticized
as solving a problem for the past
without creating a future solution,
this plan looks to change the way
student loans are handled going forward
so Mary doesn't end up owing $60,000 for her $30,000 degree.
(bright music)