How to calculate your monthly student loan payment under proposed income-driven repayment plan changes

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• The Biden administration has proposed changes that could dramatically lower monthly student loan payments.
• Some borrowers could also receive forgiveness after 10 years of payments.
• Here’s how to calculate monthly student-loan payments when the payment pause ends.

With the focus of many student loan borrowers on the court challenges against President Joe Biden’s broad-based forgiveness plan, the administration is working on a separate proposal that could dramatically reduce payments.

The Education Department this month introduced new regulations that would amend the terms of an income-driven repayment (IDR) plan known as Revised Pay as You Earn, or REPAYE. The plan calculates monthly payments based on a borrower’s discretionary income. The changes could reduce some of them to zero.

“For your typical undergraduate borrower, payments under an IDR plan will be going down about two-thirds,” says Travis Hornsby, a chartered finanical analyst (CFA) and founder of Student Loan Planner.

Currently, your monthly payments are capped at 10% of discretionary income, which is the amount of money you have available to spend on the things you want after covering fixed expenses, Hornsby explains.

Discretionary income is calculated using 150% of the federal poverty level guidelines. This means, across the country, regardless of the cost of living in your city, under the program, your fixed expenses are assumed to cost $21,870 per year, 150% of the federal poverty guideline for a family size of one in 2023.

The rest of your income is considered discretionary, and payments are capped at 10% of that amount. 

Here’s a detailed list of the Education Department’s proposed changes:

How much would the proposed changes lower my monthly student-loan payments?

To calculate your monthly student-loan payments, you need the following:

• Your student loan type
• Your annual gross income (AGI), which you can find on your 1040 tax form
• Your family size

Income-driven repayment plans are not available for Parent PLUS loans, and the calculations are slightly different for graduate loans, says Hornsby. Here are the types of student loans that are eligible:

• Direct subsidized loans
• Direct unsubsidized loans
• Direct PLUS loans made to graduate or professional borrowers
• Direct Consolidation Loans that did not repay any PLUS loans made to parents

For a complete list of loans eligible for IDR plans, visit the Federal Student Aid website.

Here’s how to figure out how your payment would be reduced under the proposed regulations. 

Step 1: Calculate your discretionary income

To calculate your discretionary income, find the federal poverty guideline for your family size, which is published by the Department of Health and Human Services.

* For the 48 contiguous states and the District of Columbia

Hornby recommends using the following equations to calculate your monthly payments, starting with your discretionary income:

Your annual gross income – (poverty guideline for your family size x 2.25)

For example, if your AGI is $60,000 and your family size is 1:

$60,000 – ($14,580 x 2.25) = Your discretionary income is $27,195

Step 2: Calculate 5% of your discretionary income

Use this equation to get your monthly payment:

(Discretionary income x 0.05) ÷ 12

Following the example above:

($27,195 x 0.05) ÷ 12 = Your monthly payment is $113.31

Under the current IDR regulations, the same individual making $60,000 annually owes $317.75 monthly.

The new IDR proposal puts borrowers closer to student-loan forgiveness

Currently, IDR payment plan grants forgiveness after 20 years of payments, 25 years if you took out graduate student loans. Under the new proposal, borrowers who took out $12,000 or less would be granted forgiveness after 10 years of payments.

According to the Education Data Initiative, half of student loan borrowers still owe $20,000 each on outstanding loan balances after 20 years of entering school.

“The takeaway is: At least four out of five undergrad borrowers would be better candidates for student-loan forgiveness under this new plan, rather than paying the whole amount back,” says Hornsby.  

Borrowers can submit public comments on these proposals for the next 30 days via The Federal Register. The final implementation of these reforms do not yet have a firm date.

Due to lawsuits filed against Biden’s $10,000 widescale forgiveness plan announced in August 2022, the federal student-loan payment pause has been extended until June 2023, or 60 days after the litigation is resolved.