The end of June has seen several major student loan policy updates in quick succession. Let’s take a brief look at what happened, what the impact will be, and what comes next.
Forgiveness Plan Struck Down
What happened: In their decision in Biden v. Nebraska, the Supreme Court struck down the Biden Administration's plan to immediately forgive $10,000 or $20,000 for qualifying student loan borrowers in a one-time action.
The reasoning: The policy’s legal justification was based on the HEROES Act, a law passed after the 9/11 attacks that gives the Secretary of Education authority to “waive or modify any statutory or regulatory provision” to give relief to borrowers during a national emergency. The court ruled that the forgiveness plan went beyond waiving or modifying and was therefore not valid.
What this means: The forgiveness plan as we know it will not proceed. (A different version may, and more on that below.) It was estimated that 43 million borrowers would have received forgiveness under this program.
New Legal Authority for Forgiveness
What happened: In his remarks on the afternoon of June 30th, President Biden announced his intention to try to issue the forgiveness plan once again under the new legal authority of the Higher Education Act. Many advocates see this as a more solid legal argument for the plan, but it will not go into effect quickly, if at all.
What’s next: This plan will go through the negotiated rulemaking process before it’s confirmed, and even they may be subject to judicial challenges. We’ll continue to provide updates as they’re available. The program that comes out of this process may not be the one that started it - it could potentially have different eligibility rules than the previous program, for example.
“On Ramp” for Payments Resuming
What happened: As part of his remarks, President Biden also confirmed that there would be an “on ramp” for payments resuming in the fall of 2023. Interest will start accruing on federally held student loans in September, and payments will be due starting in October. However, for a 12 month period, missing a payment won’t come with the usual negative consequences it normally would. It won’t be negatively reported on credit scores, and it won’t count toward delinquency and default.
What’s next: President Biden also emphasized the new income-driven repayment (IDR) plan that’s coming soon. IDR typically caps a borrower’s monthly payment at 10% of discretionary income with a 20 or 25 year forgiveness timeline. The new plan will eventually cap the payments at 5%, cap interest accrual, and offer a 10 year forgiveness timeline for certain undergraduate borrowers. It’s estimated that the percentage of borrowers who will benefit from this program will go from 52% to 73% when the new plan is in effect, saving an average of $1,000 per borrower per year.
The Supreme Court’s decision compounds the factors that are already standing in the way of financial stability for many borrowers, impacting their ability to save for emergencies, fund their retirement, and in many cases meet basic needs. It’s a critical time for financial institutions and employers to provide support and guidance for borrowers facing the cliff of payments and interest resuming for the first time in three years against a backdrop of economic uncertainty.
There are ways to help, whether that’s providing support for IDR and other federal and state assistance programs, contributing directly to employees’ student loans, or starting to match student loan payments toward retirement plans in 2024 under Secure Act 2.0. There are also actions borrowers can take to make sure they’re prepared for payments to resume in the fall.