- [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)
