The Biden administration’s student loan forgiveness plan has been shut down, leaving the 26 million borrowers who have already applied for debt relief in financial limbo. However, the story does not end there, and employers and employees alike must be prepared for what may happen next.
Bident’s unique student loan forgiveness was struck down earlier this month by Texas federal court judge Mark Pittman as “an unconstitutional exercise of Congress’s legislative power.” In response, the Biden administration is extending student loan payments until after June or as long as the student loan forgiveness plan can move forward; Initially, monthly loan payments were supposed to resume in January, giving borrowers a little more time.
The Biden administration has already filed an appeal, and the case is likely to reach the Supreme Court. So a quick resolution is unlikely, says Meagan McGuire, a senior student loan counselor at Student Loan Planning, a student loan consulting firm.
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“Ultimately, it was deemed illegal, which means the plan was not just stopped but canceled for now,” she says. “But the Department of Education seems pretty sure they can prevail.”
McGuire notes that the Biden administration is already appealing another adverse ruling from the Court of Appeals for the Eighth Circuit. Still, President Biden has stated that he believes his plan is legal and will take effect even after facing a Republican-majority Supreme Court.
In fact, 16 million borrowers have already been approved for forgiveness, and Secretary of Education Miguel Cardona told them by email that “we will forgive your approved debt as long as we prevail in court.” While those payments are currently frozen, the Biden administration was also forced to stop accepting and processing applications.
McGuire points out that each adverse ruling is supported. The Eighth Circuit Court believes there may be potential harm to state revenue as a major Missouri-based loan servicer, which pumps money into the state treasury, will lose interest income if the debt is forgiven. The Texas federal court judge, on the other hand, does not believe that President Biden has the authority to cancel student loan debt, even under the HEROES Act of 2003. This law establishes that the Secretary of Education has the expansive power to alleviate difficulties. of student loans that borrowers may experience as a result of national emergencies.
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“There are many rules under the HEROES Act that allow the president’s administration to have more authority in extraordinary circumstances,” says McGuire. “But the judge doesn’t think Biden can use a national emergency for this.”
Many Republicans view Biden’s plan as a misreading of the law because the pandemic is no longer considered a national emergency. While COVID cases remain the cause of nearly 2,000 deaths a week, the Biden administration declared the pandemic “over” in September, which may not work in his favor.
However, there may be important precedent for getting student loan forgiveness across party lines: Most notably, the US government was able to forgive $755 billion in Paycheck Protection Program loans, which they were designed to help small businesses keep workers employed during the onset of the pandemic. . These loans have essentially become government grants, with 91% of loans forgiven in whole or in part. In contrast, the Congressional Budget Office estimates that one-time student loan forgiveness will cost $400 billion.
PPP loan forgiveness was intended to help keep the economy afloat by ensuring people had the means to spend; student loan forgiveness may not be that different, says McGuire.
“One-time student loan forgiveness frees up cash that can go elsewhere,” she says. “So does it help drive economic growth or does it help the economy in any way? I think it potentially does.”
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McGuire is also hopeful that even if the Biden administration doesn’t enact the relief, he can still put his new income-based payment plan into effect. IDR plans currently allow borrowers to make monthly payments based on their discretionary income, or the amount of Adjusted Gross Income that is greater than 100% or 150% of the federal poverty line. After 20 or 25 years of payments, balances are forgiven. Biden’s IDR plans will be based on 225% of the poverty line, will be forgiven after 10 years of payments on original loan balances of $12,000, and will cover all accrued interest. This means that borrowers’ balances will not grow based on interest as they meet their monthly contributions.
“People with loan balances greater than their income typically have to turn to plans based on income just to make the payment affordable,” says McGuire. “But even though they are making payments, their balance is growing. This new plan would be more generous and make forgiveness more achievable.”
McGuire sees this new IDR plan as having an even greater impact than the one-time forgiveness, as it would make the monthly payments much more manageable. However, it is important to note that the 3.6 million Parent Plus Loans borrowers currently do not have access to an income-based plan, putting additional financial pressure on families. While McGuire hopes to see the Biden administration include Parent Plus Loans, his assumption is that it can continue to be left out.
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“The Parent Plus problem is going to get bigger and bigger because of the costs of undergraduate education,” says McGuire. “They have very limited options compared to what a regular student has access to.”
Regardless of whether Biden’s one-time forgiveness plan prevails in court, McGuire expects to see more changes in the student loan landscape. In the meantime, he advises employers to have the resources to help employees cope with payments once they restart.
“We haven’t been making payments for a long time because of COVID,” says McGuire. “For those planning to repay the loans, these changes definitely have an impact.”