The SCOTUS Call on Student Debt

We’re back today to discuss how another Supreme Court (SCOTUS) ruling is affecting college students, both present and past, in regard to student debt.

President Biden made a campaign promise of reducing student loan debt for borrowers. And in 2022, he unveiled his plan, which included ten thousand dollars of federal loan forgiveness for borrowers who earn under $125,000 in adjusted gross income (or $250,000 for a married couple), and double that to $20,000 of forgiveness for those borrowers who were also Pell Grant recipients.

There are people across the political spectrum with a variety of opinions about forgiving loans. There are some who feel borrowers should be responsible for every dollar they agreed to repay. There are others who feel this debt relief didn’t go nearly far enough. And there are others still who just welcome any relief they can get.

There’s also a very reasonable point to consider, that forgiving loans will do nothing to lower the rising cost of college, which goes up an average of 3 to 5% each year. And without addressing that root problem, we’ll just wind up right back at the same level of student debt not too far down the road. It’s tantamount to just sticking a Band-Aid on an ER patient who’s bleeding out.

Plus, if students can get forgiven for loans they take out, it may encourage reckless borrowing, which will only encourage universities to raise their prices faster, driving up the cost of getting an education, which at some top colleges has already crossed $90,000 a year, on its way to $100,000 a year. That’s not sustainable.

These are high-level, macro problems less likely considered in American households struggling to budget and make their monthly bills.

Members of the opposition party from six states filed suit to block the president’s relief package for student debt, which eventually went all the way to the SCOTUS, and this week the court announced their ruling to overturn it. That means this loan forgiveness has not been and never will be implemented.

But while people are very focused today on celebrating or mourning the cancellation of student debt, there are still debt relief measures the president plans to enact before payments turn back on in October that this SCOTUS decision hasn’t invalidated.

For decades there have been essentially two ways borrowers can pay back their student loans.

They can pick a window of time — typically from 10 to 25 years — and their loan administrator will calculate the monthly payment for that period, then charge the borrower the same amount every month until the debt is fully repaid.

It works essentially like a mortgage, where some portion of each payment goes toward the principle of the loan, and the rest goes toward interest. And over time, the proportion of each month’s payment that’s principal goes up as the interest goes down.

Then there’s what’s called an income-based or “income-driven” repayment plan. That’s where borrowers pay a percent of their income after a certain living allowance.

The idea is that, during years when graduates’ earnings are low, especially those first few years after college when they’re just beginning their careers, their monthly payments are more affordable, and then in the years when they have more income, often later in their careers, they can afford to pay more.

This can be a big help to younger people and families who might otherwise be struggling just to put food on the table and afford other necessities like child care and medical expenses. It can also be helpful to anyone carrying student loans who’s out of work or just isn’t getting paid much at their current job.

Again, there were a lot of systemic changes expected from the president’s program beyond just debt cancellation. But overturning the debt cancellation part hasn’t voided some of those other provisions. Let’s break them down.

The living allowance for income-driven repayment plans will go up by half, from 150% of the poverty line to 225%.

The percent of a borrower’s income above that living allowance that they’ll have to pay is getting cut in half, from 10% to 5%.

The Obama administration passed a law qualifying any borrower for full forgiveness after 20 years of on-time, income-driven repayments. President Biden’s plan lowers that forgiveness hurdle to 10 years for borrowers whose initial loan was less than $12,000, and he still expects that provision of his initial relief plan to go forward.

And maybe most importantly for borrowers on income-driven repayment programs, the SAVE Plan (as they’re calling it) still promises an end to residual compounding interest.

This is a big one. That means if a borrower’s monthly income-based payment is less than the month’s calculated interest on their loan, any interest in excess of that payment will be forgiven — or just not assessed, depending on how you look at it.

For decades, that remaining interest had been added to borrowers’ balances, and the interest then compounded. That’s where we’ve heard horror stories like borrowers who took out a loan for $20,000, paid back $30,000, and then somehow still owed $40,000. But the current administration expects that will end this summer, before interest begins calculating again on September 1.

The Supreme Court’s decision about loan forgiveness hinges on the fact that the president tried enacting these sweeping changes from the executive branch, without going through the legislative branch. So theoretically, a different Congress after a future election could still pass some amount of debt forgiveness through both chambers and send that bill to this or a future president’s desk.

Different administrations have different priorities, and who gets elected can affect people’s lives. Today’s decision will certainly affect the lives of the 27 to 40 million borrowers who were estimated to have been eligible to receive up to $20,000 off their debt. And I’m sure some of those people vote. So we’ll see what future elections may bring.

In the meantime, the student loans that have been on hold since the start of the pandemic are now scheduled to turn back on. Borrowers will be contacted by their loan servicers in advance, but it’s looking like the first bills will be due at the start of October.

Many borrowers will have to resume making payments, while younger borrowers will be navigating the system and making payments maybe for the first time. Those younger borrowers can enroll in an income-driven repayment plan — if that’s the best plan for them — at StudentAid.gov/IDR.

Time will tell what effect turning payments back on all at once will have on the economy and inflation. But the president has already announced a 12-month “On-Ramp” period where, if borrowers miss a payment or are late, they won’t be considered in default, and it won’t affect their credit scores. But interest will still be accruing, so it’s important to make those payments.

The president has also announced he’ll be looking at how the Department of Education can still discharge some student debt, but in more targeted ways, like how Public Service Loan Forgiveness works, as opposed to the blanket forgiveness that’s now been struck down by the SCOTUS.

And until that first payment is due, any payments borrowers have made or will make during this frozen period go directly toward principle, which will save interest and help borrowers pay off their debts sooner.

If you have any questions, don’t hesitate to reach out to us at 732-556-8220. We are here to help.