In response to recent court rulings that have blocked key components of a student loan policy, the Biden administration is planning to place approximately 3 million student loan borrowers into a payment pause. This pause will be similar to the pandemic-era student loan moratorium, where borrowers will not need to make payments and interest will not accrue.
The SAVE Plan, which is considered the most affordable plan for borrowers and a significant part of President Joe Biden’s student debt reform efforts, has been targeted by two Republican-led lawsuits. These lawsuits argue that the Biden administration has overstepped its authority in certain aspects of the plan. The decision to pause millions of borrowers’ payments follows court rulings in Kansas and Missouri that favored the GOP states, preventing the Biden administration from further implementing the SAVE Plan. This plan, which was introduced last August, is currently used by 8 million people.
The court rulings specifically halted the Department of Education from reducing borrowers’ payments from 10% of their discretionary income to 5% for those with undergraduate loans, starting July 1. Additionally, the rulings stopped the cancellation of loans for individuals who had taken out small initial loan balances but had been paying them down for over a decade. So far, 414,000 people have qualified for such debt relief.
In an appeal of the Kansas decision, the Department of Justice stated that the government would need to place borrowers into a pause to comply with the judge’s ruling on the monthly payment aspect. They also requested an emergency motion to prevent the ruling from taking effect. Brian Boynton, the Department of Justice’s principal deputy assistant attorney general, argued that the injunction would cause irreparable harm to the federal government, leading to unrecoverable disruption costs and creating extraordinary confusion and chaos for borrowers.
Boynton explained that reverting to charging borrowers 10% of their income would take several months, as it took months of preparation to implement the new payment calculation. During this time, the Department would have no choice but to place a large number of SAVE borrowers into forbearance until its servicers’ systems could correctly calculate the payments due. He emphasized that the resulting chaos, confusion, and unrecoverable costs should be avoided.
The Department of Justice also argued that borrowers would be harmed by the temporary loan pause because the months in forbearance would not count toward eventual debt relief under plans like the public service loan forgiveness program (PSLF) or other income-driven repayment plans that forgive borrowers’ debts after 20-25 years of payment. During the pandemic payment pause, each month was counted toward those programs.
Borrowers enrolled in SAVE were already placed into forbearance for the month of July to transition smoothly to the lower payment calculation before the court rulings. If the judges do not grant the federal government’s request, that forbearance is expected to continue in the coming months. The payment pause would apply to slightly less than half of the 8 million people enrolled in SAVE. About 4.5 million people who qualify for $0 payments due to low incomes would not be included in the pause.
Despite the setback from the court rulings, the Department of Education maintained that the SAVE Plan still offers significant benefits for borrowers. In addition to providing the lowest monthly payment for most borrowers, the plan also protects borrowers from unpaid interest accrual. Unpaid interest is forgiven as long as qualified borrowers make their monthly payments on the loan itself, even if their required payment is $0.
This setback is part of a pattern for Biden’s attempts at major changes to the student loan system. College debt is a significant issue for young voters in the 2024 campaign, and many were disappointed when Biden could not fulfill his pledge to cancel $10,000 to $20,000 in debt last year after the U.S. Supreme Court overturned his sweeping debt relief policy.
Biden’s continued efforts to cancel debt in a more piecemeal fashion have now reached nearly 4.75 million borrowers, which he highlights on the campaign trail to gain support from a key voting group. Only 3% of the debt relief issued by the Biden administration has been through the SAVE Plan, while the majority has been through fixes to programs like PSLF and income-driven repayment plans, which were plagued by administrative failures, or targeting colleges that have defrauded students.
The administration is also working on a Plan B to Biden’s initial, widespread debt relief proposal, taking a narrower approach that could cancel debt for about 30 million people in total, including those who have already had debts canceled. The administration hopes this more bureaucratic approach will not be overturned by the court again, although it is almost certain to face lawsuits once it reaches its final stages this summer.
The number of borrowers who may receive student loan debt forgiveness under the new policy proposal is vast. It could range from automatic cancellation for people on the verge of defaulting on their loans to application-based relief for individuals struggling to pay down their debts due to costs like healthcare or housing. Other factors include the amount borrowers are paying toward their student loans compared to their income and assets, as well as loans they have outside of higher education and whether they have been able to pay those down. The department also wants to consider whether borrowers received a Pell Grant, designed for low-income college students, and whether they use any other government support programs.
Source: CNN, Bloomberg
