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)