Supreme Court ruling on student loans upends Biden’s plan to help borrowers resume payments

WASHINGTON, DC – FEBRUARY 28: People gather to show their support for the Biden administration's student debt relief plan outside the United States Supreme Court on Tuesday, February 28, 2023 in Washington, DC.  The High Court is hearing arguments in Biden v Nebraska and Department of Education v Brown, which will decide the fate of the program which aims to cancel an estimated $400 billion in student debt for 26 million borrowers.  (Kent Nishimura/Los Angeles Times)

People gather in Washington, DC in February to show their support for President Biden’s student debt relief plan. (Kent Nishimura/Los Angeles Times)

When President Biden announced his intention to cancel up to $20,000 in federal student loans for certain borrowers last August, he presented it as part of a multi-pronged approach to ease the burden on holders loans and prevent a wave of defaults.

Now, in the final months of the federal student loan repayment pause, it is clear that much of that safety net will not materialize.

The Supreme Court on Friday blocked Biden’s debt cancellation plan, and his administration is still finalizing an overhaul of a program that allows borrowers to pay only a small portion of their discretionary income for student loans. Several third-party companies hired by the Department of Education to collect debts have laid off staff, reduced call center hours or stopped handling student loans.

Learn more: Supreme Court strikes down Biden’s plan to forgive millions in student loans

The Biden administration now faces an unprecedented task: helping tens of millions of borrowers make payments in a student loan system that has been dormant for three years.

“Nothing like this has ever been attempted in the history of consumer credit,” said Cody Hounanian, executive director of the Student Debt Crisis Center, which advocates for debt cancellation. “It’s a huge and monumental task that will encounter roadblocks and obstacles along the way.”

Congressional Democrats and debt forgiveness supporters are urging Biden to continue pushing for loan forgiveness before payments resume later this year. Biden said he will announce the next steps his administration will take on Friday afternoon.

“I believe the Court’s decision to overturn our student debt relief plan is wrong,” Biden said in a statement. “But I will stop at nothing to find other ways to support hard-working, middle-class families.”

Federal student loan payments were suspended and interest did not accrue under a forbearance program that was repeatedly extended under former President Trump and President Biden. After several false starts, the Biden administration was legally barred from extending the suspension of payments due to provisions of the agreement he signed earlier this month to raise the debt ceiling. Interest on student loans will begin to accrue on September 1 and loan payments will be due from October.

Borrower advocates and administration officials are bracing for a tough return to repayment.

When Biden announced his plan to cancel student loan debt last year, he said that “by resuming student loan repayments at the same time as we provide targeted relief, we are following an economically responsible path.” .

Under the stalled plan, the Department of Education would have forgiven up to $10,000 in federal student loan debt for people earning less than $125,000 a year, or $250,000 for married couples. People who received Pell grants for low-income students would have been eligible for an additional $10,000. The administration estimated that nearly 20 million people would have qualified to have their debt eliminated by the proposal.

In addition to cancellation, Biden touted changes the administration was making to programs designed to help borrowers lower monthly payments or get their loans forgiven.

The most significant proposal is the Department of Education’s overhaul of one of its income-tested reimbursement programs. Under proposed new regulations released in January, the threshold for what is considered discretionary would be raised from incomes above 150% of the federal poverty level to 225%. Undergraduate borrowers in debt will only owe 5% of their discretionary income each month, down from 10% previously.

People earning less than $30,600 a year (or $62,400 in a family of four) owe nothing each month on student loans. Borrowers whose monthly payments do not cover accrued interest would have waived it. The Congressional Budget Office estimated the plan would cost $230 billion over the next 10 years.

The plan will be finalized this year, Undersecretary for Education James Kvaal told a House panel in May.

Opponents of the plan say it may encourage students to borrow more and encourage colleges to charge more tuition.

Biden’s student loan policy has not focused on blanket cancellation, but on improving the complex web of safety net programs available to help borrowers, often by canceling policies implemented by the department. of Trump’s education.

The Biden administration has approved tens of billions in loan cancellations for people who say they have been defrauded by their colleges and made it easier for people with permanent disabilities to repay their loans.

The Ministry of Education has also made it easier for people who work in government or nonprofits, such as teachers, nurses and social workers, to get their loans forgiven through the program. cancellation of public service loans. More than 615,000 civil servants have been approved for $42 billion in rebates under the program, the department announced in May.

But the bulk of federal student loan debt — about $1.7 trillion held by 43 million Americans — won’t be forgiven anytime soon.

Without loan cancellation or a new income-driven repayment plan, many borrowers will revert to a loan system almost identical to the one that existed before the COVID-19 pandemic.

“I view the payment pause as a tourniquet,” said Persis Yu, deputy executive director and general counsel at the Student Borrower Protection Center. “The problem is that you can’t just drop a tourniquet; you actually have to do the repair. And we didn’t.

A lot has changed for borrowers in three years. Some have moved and haven’t updated their contact information with their loan officer. Some have new loan managers. Some were behind on their loans before the repayment break, while others are earning higher or lower incomes that will affect their monthly balances. Millions of borrowers who have graduated since 2020 will make their first student loan repayments later this year.

Learn more: Anxious about your student loan debt? Beware of offers that are too good to be true

At the heart of the predicament of the student loan system is the mismatch between the scale of the challenge and the resources available. The federal student aid office received $800 million less than it requested from the government this year as Republicans in Congress blocked funding that could be used to implement loan forgiveness . This has led to fewer resources for contracts with loan servicing companies, which have reduced their activities just when demand is about to explode.

Federal loan managers such as Navient and Great Lakes exited the student loan market and shifted their portfolios to other companies. About 44% of student loan holders will need to working with a new repairman when payments resume, depending on a June 2023 report by the Consumer Financial Protection Bureau.

The loan repayment system was not designed to handle millions of people returning to pay at the same time, said Scott Buchanan, executive director of the Student Loan Servicing Alliance, a trade association for organizations that service loans. student loans. He encouraged borrowers to start contacting servicers now.

“If we can flatten the demand curve on the student loan servicing environment by having people contact us in June, July and August … we can alleviate some of the pressures that are going to be on the system,” said Buchanan said.

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This story originally appeared in the Los Angeles Times.

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