2025 Student Loan Rates at 13-Year Highs: How Biden’s New Plan Could Save Borrowers Thousands
Explore how rising federal student loan interest rates in 2025 might not impact most borrowers thanks to President Biden’s innovative income-driven repayment overhaul designed to reduce payments and offer loan forgiveness.
Diccon Hyatt is a seasoned financial journalist who has extensively covered economic trends during the pandemic, simplifying complex financial issues to highlight their effects on personal finances and markets. His experience includes work with U.S. 1, Community News Service, and the Middletown Transcript.
With federal student loan interest rates reaching their highest point since 2010, prospective college students might feel discouraged. However, for many borrowers, these higher rates may have minimal impact due to upcoming changes in repayment policies.
Starting with undergraduate loans set at a 5% interest rate for the upcoming academic year, the significance of these rates is expected to diminish considerably if President Joe Biden’s proposed income-driven repayment (IDR) reforms are enacted.
Understanding Biden’s New Income-Driven Repayment Plan
Biden’s proposal would require borrowers to pay only 5% of their discretionary income—defined as income exceeding 225% of the federal poverty line—towards their student loans. This payment structure applies regardless of the loan balance or interest rate. After 20 years of payments (or 25 years for graduate loans), any remaining balance would be forgiven.
Importantly, for borrowers who reach the forgiveness period with outstanding balances, higher interest rates would not increase monthly payments or extend repayment duration. Additionally, if monthly payments under the plan do not cover accruing interest, the unpaid interest would be forgiven, preventing loan balances from growing while payments are made. This contrasts with current IDR plans, where unpaid interest can cause balances to increase over time.
Compared to existing IDR programs requiring 10% of income above 125% of the poverty line, Biden’s plan is notably more generous, making it an attractive option for many borrowers.
Greater Financial Relief with the New Proposal
The Department of Education aims to implement these new IDR plans by the end of 2024, which could substantially reduce the number of borrowers who fully repay their loans.
According to a January analysis by the Urban Institute, only 22% of bachelor’s degree holders with an average $31,000 loan would fully repay under the new plan, compared to 59% under current IDR rules. For associate degree holders with $13,000 in loans, just 11% would pay off their balances completely.
While Biden’s income-driven repayment overhaul has received less public attention than his controversial plan to forgive up to $20,000 in student debt—which is currently under Supreme Court review—it promises to reshape the future of student loan repayment. The Department of Education estimates typical borrowers could save around $2,000 annually compared to existing repayment plans.
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