WASHINGTON (AP) — The Biden administration is calling it a “student loan safety net.” Opponents call it a backdoor attempt to make college free. And that could be the next battleground in the legal battle over student loan relief.
Starting this summer, millions of Americans with student loans will be able to enroll in a new repayment plan that offers some of the most lenient terms ever. Interest will not accrue as long as borrowers make regular payments. Millions of people will see their monthly payments reduced to $0. And in as little as 10 years, any remaining debt will be forgiven.
It’s known as the SAVE Plan, and although it was announced last year, it was largely overshadowed by President Joe Biden’s proposal to write off student loans en masse. But now, after the Supreme Court struck down Biden’s pardon plan, the repayment option is taking center stage.
Since the decision, Biden has offered an alternative approach to canceling debt and also drew attention to the lesser-known initiative, calling it “the most affordable repayment plan ever.” The typical borrower who signs up for the plan will save $1,000 a month, he said.
Republicans fought against the plan, saying it overstepped the president’s authority. Senator Bill Cassidy, the prominent Republican on the Health, Education, Labor and Pensions Committee, called it ‘deeply unfair’ to the 87% of Americans who don’t have student loans. .
The Congressional Budget Office had previously estimated that over the next decade the plan would cost $230 billion, which would be even higher now that the pardon plan has been cancelled. Estimates by researchers at the University of Pennsylvania put the cost at $361 billion.
Emboldened by the Supreme Court’s ruling on the reversal, some opponents say it’s only a matter of time before the repayment plan also faces a legal challenge.
Here’s what you need to know about the SAVE plan:
WHAT IS AN INCOME-DRIVEN REPAYMENT PLAN?
The US Department of Education offers several plans for repaying federal student loans. Under the standard plan, borrowers must pay a fixed monthly amount that guarantees that all of their debt will be paid off after 10 years. But if borrowers find it difficult to pay that amount, they can enroll in one of four plans that offer lower monthly payments based on income and family size. These are known as income-driven repayment plans.
Income-oriented options have been available for years and generally cap monthly payments at 10% of the borrower’s discretionary income. If a borrower’s income is low enough, their bill is reduced to $0. And after 20 or 25 years, any remaining debt is erased.
HOW IS BIDEN’S PLAN DIFFERENT?
As part of his debt relief plan announced last year, Biden said his education department would create a new income-focused repayment plan that would cut payments even further. It became known as the SAVE Plan, and it’s generally intended to replace existing income-focused plans.
Borrowers will be able to apply later this summer, but some of the changes will be phased in over time.
Immediately, more people will be eligible for $0 payouts. The new plan will not require borrowers to make payments if they earn less than 225% of the federal poverty level, or $32,800 a year for a single person. The threshold for current plans, on the other hand, is 150% of the poverty line, or $22,000 per year for a single person.
Another immediate change is aimed at preventing interest from snowballing.
As long as borrowers make their monthly payments, their overall balance will not increase. Once they’ve covered their adjusted monthly payment, even if it’s $0, any remaining interest will be forfeited.
Other major changes will come into effect in July 2024.
Most notably, payments on undergraduate loans will be capped at 5% of discretionary income, up from 10% currently. Those with graduate and undergraduate loans will pay between 5% and 10%, depending on their original loan balance. For millions of Americans, monthly payments could be cut in half.
Next July will also bring a faster path to loan forgiveness. From there, borrowers with an initial balance of $12,000 or less will have the rest of their loans forgiven after 10 years of payments. For each $1,000 borrowed beyond that, cancellation will occur after an additional year of payments.
For example, a borrower with an initial balance of $14,000 would get all remaining debt forgiven after 12 years. Payments made before 2024 will count towards the discount.
HOW TO APPLY?
The Department of Education says it will notify borrowers when the new application process launches this summer. People enrolled in an existing plan known as REPAYE will automatically be moved to the SAVE plan. Borrowers will also be able to enroll by contacting their loan servicers directly.
It will be available to all Direct Lending Program borrowers who are in good standing on their loans.
WHAT ARE THE ADVANTAGES AND DISADVANTAGES?
Supporters say Biden’s plan will simplify repayment options and provide relief to millions of borrowers. The Biden administration has argued that rising student debt is putting college out of reach for too many Americans and holding borrowers back financially.
Opponents call it an unfair advantage for those who don’t need it, saying it passes a heavy cost on taxpayers who have already paid off student loans or missed college. Some worry that this will encourage colleges to raise tuition fees because they know that many students will have their loans canceled later.
Voices across the political spectrum said it amounted to a form of free college. Biden campaigned on a promise to make community college free, but he failed to win congressional support. Critics say the new plan is an attempt to do something similar without congressional approval.
IS IT LEGAL?
It depends on who you ask, but the matter hasn’t been taken up in federal court.
Instead of creating a new payment plan from scratch, the Biden administration has proposed changes to an existing plan. He cemented those changes by going through a negotiated rulemaking process that allows the Department of Education to craft federal regulations without Congress.
This is a process commonly used by administrations of both political parties. But critics question whether the new plan goes further than the law allows.
More than 60 Republican lawmakers urged Education Secretary Miguel Cardona to withdraw the plan in February, calling it “reckless, fiscally irresponsible and blatantly illegal.”
Proponents argue that the Obama administration also used its authority to create a repayment plan that was more generous than any at the time.
The Biden administration officially finalized the rule this month. Tories believe he is vulnerable to a legal challenge, and some say it is simply a matter of finding a plaintiff with the legal right – or standing – to sue.
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