When President Biden announced his plan to cancel up to $20,000 in federal student loans for some borrowers last August, he framed it as part of a multi-pronged approach to ease the burden on creditors and avoid a spate of defaults.
Now, in the final months of the federal student loan repayment lull, it’s clear that much of that safety net won’t materialize.
The Supreme Court on Friday blocked Biden’s debt forgiveness plan, and his administration is still finalizing a review of a program that allows borrowers to pay only a small part of their discretionary income for student loans. Several third-party companies hired by the Department of Education to collect debt have laid off staff, cut call center hours, or stopped handling student loans.
The Biden administration now faces an unprecedented task: helping tens of millions of borrowers make payments on a student loan system that has been inactive for three years.
“Nothing like this has ever been attempted in the history of consumer finance,” said Cody Hounanian, executive director of the Student Debt Crisis Center, which advocates for debt cancellation. “It is a huge and monumental task that will face bumps and obstacles along the way.”
Federal student loan payments have stopped and no interest has accrued under a forbearance program that has been extended multiple times under former President Trump and President Biden. After several false starts, the Biden administration has been legally blocked from extending the default due to provisions of the agreement he signed earlier this month to raise the debt ceiling. Student loan interest will begin to accrue on September 1, and loan payments will be due beginning in October.
Biden announced Friday that he will begin a new regulatory process to enact student debt relief under the Higher Education Act of 1965, a different law than the one he originally used.
Although the new path may take longer, Biden said he believed it was legally sound and “the best path left to serve as many borrowers as possible.”
To make it easier for borrowers to repay, he said his administration is creating a temporary 12-month “ramp payment program,” which he said was not the same as payment pause. He encouraged borrowers who can pay their monthly bills to do so, but said the new program would temporarily remove the threat of default or damage to borrowers’ credit.
“Today’s decision has closed a path,” said the president standing next to the Secretary of Education, Miguel Cardona. “Now let’s go find another one.”
Borrower advocates and servicing officials are bracing for a rocky return to payment.
When Biden announced his student loan debt cancellation plan last year, he said, “By resuming student loan payments while providing targeted relief, we are taking a financially responsible course.”
Under the locked-in 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 reduced or eliminated under the proposal.
In addition to the cancellation, Biden touted changes the administration was making to programs designed to help borrowers lower monthly payments or get their loans forgiven.
The biggest proposal is the Department of Education’s review of one of its income-based payment programs. Under new proposed regulations published in January, the threshold for what counts as discretionary would be raised from income above 150% of the federal poverty level to 225%. Borrowers with undergraduate debt would owe just 5% of their discretionary income each month, up from 10%.
People who earn less than $30,600 a year (or $62,400 in a family of four) owe nothing each month in student loans. Borrowers whose monthly payments do not cover accrued interest would be exempted. The Congressional Budget Office estimated the plan would cost $230 billion over the next 10 years.
The plan will be finalized sometime this year, Assistant Secretary for Education James Kvaal told a House panel In May.
Opponents of the plan say it may entice students to borrow more and encourage universities to charge more for tuition.
Biden’s student loan policy has focused not on blanket cancellation, but on enhancing the complex web of safety-net programs available to help borrowers, often undoing policies implemented by Trump’s Department of Education.
The Biden administration has approved tens of billions in loan cancellations for people who say they were defrauded by their colleges and made it easier for people with permanent disabilities to repay their loans.
The Department of Education has also made it easier for people who work in public service or nonprofit jobs, such as teachers, nurses, and social workers, to pay off their loans through the Public Service Loan Forgiveness program. More than 615,000 public servants have been approved for a $42 billion forgiveness through the program, the department announced in May.
For the record:
14:22 June 30, 2023An earlier version of this article reported that Americans have a total of about $1.7 trillion in federal student loan debt. Americans have $1.6 trillion in federal student debt.
But the bulk of federal student loan debt, about $1.6 trillion held by 43 million Americans, won’t be paid off any time soon.
Without loan cancellation or a new income-based repayment plan, many borrowers will revert to a nearly identical lending system to what existed before the COVID-19 pandemic.
“I think of the payment pause as a tourniquet,” said Persis Yu, deputy executive director and administrative adviser at the Student Borrower Protection Center. “The problem is that you can’t just release a tourniquet; you actually have to do the repair. And we haven’t done that.”
A lot has changed for borrowers in three years. Some have moved and have not updated their contact information with their loan servicer. Some have new loan servicers. Some were behind on their loans before the payment break, while others have higher or lower income that will affect their monthly balances. Millions of borrowers who have graduated since 2020 will make their first student loan payments later this year.
At the heart of the student loan system situation is the mismatch between the size of the challenge and the resources available. The Federal Student Aid office received $800 million less than it requested from the government earlier this year as Republicans in Congress blocked funds that could be used to implement loan cancellation. That has led to fewer resources for contracts with loan servicing companies, which have been cut just as demand is about to explode.
Federal loan servicers like Navient and Great Lakes have exited the student loan market and transferred their portfolios to other companies. About 44% of student loan holders will have to work with a new admin when payments resume, according to a June 2023 report by the Consumer Financial Protection Bureau.
The loan repayment system was not designed to handle millions of people returning to repayment at the same time, said Scott Buchanan, executive director of the Student Loan Servicing Alliance, a trade association for organizations that service student loans. He encouraged borrowers to start contacting servicers now.
“If we can flatten the demand curve in the student loan servicing environment by getting people to contact us in June, July and August … we can mitigate some of the pressures that will come to the system,” Buchanan said.
Biden reiterated Friday that he believed his student debt relief program would have benefited the economy, allowing Americans burdened with student debt to buy homes, start businesses or raise families. She called the high court’s decision to strike down her student debt relief program “a mistake” and said millions of Americans were disappointed.
The president brushed aside a question about whether he gave borrowers false hope.
“I did not give borrowers false hope. But the Republicans took away the hope that they were given and it’s real, real hope,” he said.
Asked if he overstepped his executive authority, Biden told reporters he thought “the court misinterpreted the Constitution.”