Table of Contents
For nearly a year more than 25 million borrowers have been waiting for a final decision regarding student debt relief: Will some of the vast loan amounts outstanding today be canceled by the federal government? Now the Supreme Court has spoken and, with the Department of Education v. Brown decision, the answer is no, the Biden Administration does not have the authority to cancel additional student debt worth roughly $430 billion.
However, the debate is not over. Just a few hours after the Supreme Court decision was announced, the Administration said it would go forward with a new relief effort – the Save Plan – based on a different law.
In addition, the Biden Administration has already approved more than $66 billion in student debt write-downs for more than two million borrowers under the Public Service Loan Forgiveness plan. This is an existing program that will be continued and perhaps enlarged.
The Original Student Debt Relief Plan
Last August the Biden Administration proposed a student loan relief program for individuals earning less than $125,000 annually ($250,000 for married couples). The plan had three main provisions.
First, up to $20,000 in debt cancellation would be available to Pell Grant recipients for loans held by the Department of Education, and up to $10,000 in debt cancellation for non-Pell Grant recipients.
Second, required monthly payments would be substantially reduced for most borrowers.
Third, the plan was expected to “forgive loan balances after 10 years of payments, instead of 20 years, for borrowers with loan balances of $12,000 or less.”
It was estimated that nearly 90% of the relief savings would go to those earning less than $75,000 a year. Defaulted loans were eligible for relief under the proposal, as were parent PLUS loans and graduate PLUS loans. However, while the program would have helped those with federal financing, it did not apply to private loans.
Some aspects of the plan were tricky. For instance, the government said relief would not be available “if you consolidated federal loans into a private (non-federal) loan, the consolidated private loan is not eligible for debt relief.”
Easily refinance your student loans.
Compare rates from multiple lenders in minutes.
Powered by SuperMoney
Is Student Debt Relief Legal?
The Biden plan, of course, attracted great attention, and that brings us to the Supreme Court. The big question was whether a president could authorize an end to student debt worth an estimated $430 billion.
On one side were those who argued that a president had the authority to discount or forgive student loans under the HEROES Act – the Higher Education Relief Opportunities for Students Act of 2003. This law allows the Education Department to revise student debt standards in the event of a national emergency, in this case, the Covid pandemic.
On the other side are those who said the Biden plan requires congressional approval because under the Constitution such spending cannot be done by a president alone.
This is the view supported by the Supreme Court. In Biden v. Nebraska, it ruled that the HEROES Act “allows the Secretary to ‘waive or modify’ existing statutory or regulatory provisions applicable to financial assistance programs under the Education Act, not to rewrite that statute from the ground up.”
In response to the Supreme Court decision, President Biden announced that he would again provide student debt relief, this time under an older piece of legislation, the Higher Education Act of 1965. Written more than a half-century ago, it allows student debt to be waived by the government.
$66 Billion In Student Debt Relief so far
While little mentioned, it turns out that at least $66 billion in student debt has already been forgiven under the Public Service Loan Forgiveness program since Biden took office. Combine the $66 billion in forgiven student debt with the $430 billion mentioned in the Supreme Court decision, and the potential total comes to nearly half-a-trillion dollars in student debt forgiveness.
Efforts to resurrect the relief program are almost certain to again be challenged in court. For the latest information, please follow Refi.com and go to https://studentaid.gov/.
The Save Plan
The Biden Administration will next roll out its Save Plan, a program that includes several features.
First, “the Department is instituting a 12-month ‘on-ramp’ to repayment, running from October 1, 2023, to September 30, 2024, so that financially vulnerable borrowers who miss monthly payments during this period are not considered delinquent, reported to credit bureaus, placed in default, or referred to debt collection agencies.”
Second, the Save Plan will cut undergraduate loan payments from 10% to 5% of discretionary income.
Third, raise the amount of income that’s defined as “non-discretionary” income. The effect will be to eliminate required monthly payments for individual borrowers who earn $15 an hour or so.
Fourth, “forgive loan balances after 10 years of payments, instead of 20 years, for borrowers with original loan balances of $12,000 or less. The Department estimates that this reform will allow nearly all community college borrowers to be debt-free within 10 years.”
Fifth, the government will “not charge borrowers with unpaid monthly interest, so that, unlike other existing income-driven repayment plans, no borrower’s loan balance will grow as long as they make their monthly payments – even when that monthly payment is $0 because their income is low.”
All of this sounds good for borrowers, but several issues remain unsettled.
- Will you qualify for the on-ramp program if your student debt is not federally-guaranteed? Speak with lenders for details.
- Will the Save Plan be challenged in court? This seems likely, but how courts will rule is unknown.
Student Loans and Financial Impact
If the original Biden plan had gone through an estimated 27 million borrowers could have benefited, including 20 million who would see all remaining student debt canceled. As a result of less debt and smaller or eliminated monthly payments, these borrowers would generally see higher credit scores and better debt-to-income (DTI) ratios.
“Student loans are a type of installment loan,” explains TransUnion. “Like other loans, student loans appear on your credit report. As a result, they can play an important role in helping you build credit history and will impact your credit score in various ways.”
With better credit scores and smaller monthly costs, millions of individuals would have a greater ability to buy cars, homes, and other goods. This would have created what economists call a “multiplier effect,” meaning that local sales would increase, more workers would be needed, and tax revenues would rise because of additional spending.
How Student Debt Grew
With backing from Uncle Sam, millions of students have been able to finance the classes needed to enter a profession or trade, a likely path toward more income and greater job security.
What changed is that educational costs increased at a far faster pace than the rate of inflation. As a result, student debt totaled $260 billion at the start of 2004, an amount that grew six-fold to $1.6 trillion today.
According to a 2019 study from the Institute on Assets and Social Policy (IASP) at Brandeis University, in the 1960s “tuition amounted to 9% of a typical family’s income; today it takes 25%.” Federal data shows that about 24.3 million student borrowers owe $20,000 or less while roughly one million borrowers now have at least $200,000 in student debt.
September 1st Deadline
For those who still have student debt after the Supreme Court decision, the rules will change after the summer. Interest paused because of Covid will restart as of September 1st. Required payments will resume on October 1st. The resumption of student loan interest and repayments was one of the compromises made under the debt ceiling settlement that allowed the country to avoid defaulting on its financial obligations.
If you have outstanding student debt after September 1st be sure to make all required payments, otherwise a negative item can show up on credit reports. Check with your lender to confirm the required monthly payment.