The future of mass student debt cancellation remains in limbo after the Supreme Court struck down President Joe Biden\u2019s initial debt relief plan last month. In the meantime, the Biden administration is moving forward with a new payment plan that officials are touting as a \u201chuge deal\u201d for borrowers and conservative critics are calling \u201ca drastic shift in policy.\u201d <\/p>\n
Still, advocates who have watched the government tweak repayment options for years, say it isn\u2019t enough to transform the student loan system.\u00a0<\/p>\n
Hours after the court published its decision, Biden told borrowers that his administration had finalized the Saving on a Valuable Education or SAVE plan, touting it as \u201cthe most generous repayment program ever.\u201d The new plan is the latest version of income-driven repayment, a suite of plans that allow federal student loan borrowers to repay their debt as a percentage of their income and have the balance forgiven after 20 or 25 years of payments. Those plans are an alternative for borrowers who may struggle to afford mortgage-style payments that get rid of the debt over 10 years.\u00a0<\/p>\n
The final version of the SAVE plan, which the Biden administration released in the wake of the court\u2019s decision, came after more than a year and a half of proposals and discussions among stakeholders about changes to income-driven repayment. Parts of the plan will be available to borrowers when payments, interest and collections on student loans resume this fall after a more than three-year pause.\u00a0\u00a0<\/p>\n
\u201cIt is a big deal for both current borrowers and for all the future borrowers who are out there,\u201d\u00a0 Bharat Ramamurti, the deputy director of the National Economic Council, told reporters of the SAVE plan. It\u2019s \u201cnot a substitute for debt relief, but it is a huge benefit for borrowers.\u201d\u00a0<\/p>\n
How are you preparing for student loan payments to resume? Email jberman@marketwatch.com.<\/strong><\/em><\/p>\n Still, the plan has opponents and some hinted at legal challenges earlier this year. Some Republican lawmakers have criticized the plan as \u201cfiscally irresponsible\u201d and \u201cblatantly illegal.\u201d In May, an attorney at a conservative think tank said in a webinar that fighting the payment plan changes could be \u201can uphill battle\u201d and is not \u201cas strong of a case as the case against mass student debt cancellation.\u201d\u00a0<\/p>\n Ramamurti told reporters last month that given the clarity in the statute, he\u2019d be \u201csurprised\u201d if the administration was sued over the program.\u00a0<\/p>\n Decades ago, Congress authorized the Department of Education to offer federal student-loan borrowers the ability to repay their debt as a percentage of their income. These plans were initially designed as a sort of safety net for borrowers during periods of bad luck or broader economic turmoil. But over time, as college costs and student debt have ramped up, while wage growth has stayed relatively stagnant, more borrowers turned to these plans as a long-term payment strategy. Roughly 47% of the dollars in student loan repayment was being paid back on one of these plans in 2022, according to a report from the Government Accountability Office.\u00a0<\/p>\n During the Obama administration officials expanded access to these plans and made their terms more generous. Still, borrowers and advocates complained that they didn\u2019t provide enough relief. For some borrowers even an income-based payment was unaffordable and for others their monthly payments were so low that they didn\u2019t cover the interest on their debt and so their balance continued to tick up.\u00a0<\/p>\n The SAVE plan aims to tackle some of these concerns. For one, starting this fall when student loan payments resume, borrowers who use the plan won\u2019t see their balances grow, even if their payment isn\u2019t enough to cover the interest. That gets at one of the biggest complaints Betsy Mayotte, the president of The Institute for Student Loan Advisors, hears from borrowers about income-driven repayment plans.\u00a0<\/p>\n \u201cThey make a payment every single month and they just watch their balance go up,\u201d Mayotte said.\u00a0 \u201cDespite the fact that they know that after 20 or 25 years on the plan that whole amount will be forgiven, it\u2019s still pretty depressing and demoralizing to make a payment towards the debt every month only to see it go up.\u201d With the new plan, \u201cthat\u2019s not going to happen,\u201d she added.<\/p>\n In addition, starting when student loan payments resume, borrowers using the plan will see at least slightly lower monthly payments than what they were billed on other income-driven repayment plans. That\u2019s because under the SAVE plan, <\/strong>more income is protected before payments kick in.\u00a0<\/p>\n A borrower\u2019s monthly payment will be based <\/strong>on any income above 225% of the poverty line for their family size. In previous income-driven repayment plans, that threshold was 150% of the poverty line.\u00a0<\/p>\n Next summer, some borrowers could see their monthly payment amounts go down even more significantly. Starting in July of 2024, borrowers with only undergraduate loans will only be required to put 5% of their income towards their debt, down from 10%. Borrowers with undergraduate and graduate loans will pay a share of their income between 5% and 10% that\u2019s based on a weighted average of their loans.\u00a0<\/p>\n In addition, borrowers whose original loan principal was less than $12,000 will have their debt canceled after 10 years of payments.\u00a0<\/p>\n Winston Berkman-Breen, legal director at the Student Borrower Protection Center, an advocacy group, said all of the various aspects of the plan will lower payments for borrowers \u201cand it\u2019s really important to acknowledge that.\u201d\u00a0<\/p>\n Still, he said it\u2019s not \u201ca silver bullet to a fundamentally broken system,\u201d he said.\u00a0<\/p>\n That\u2019s because for one, the SAVE plan <\/strong>doesn\u2019t include everyone, he said. Borrowers with Parent PLUS loans, which are <\/strong>the loans the government provides to parents to pay for their childrens\u2019 education, aren\u2019t eligible for the plan. In addition, borrowers with student loans from graduate school don\u2019t have access to the full benefits of the plan.\u00a0<\/p>\n But even for those who are eligible, the plan doesn\u2019t address systemic issues plaguing the student loan system, advocates say. For borrowers to access the plan and stay on it until they\u2019re eligible for loan forgiveness, they have to hear about the program, apply for it and trust their <\/strong>student-loan <\/strong>servicer to follow through. \u00a0<\/em><\/p>\n That hasn\u2019t worked out well in the past. A 2021 report from the National Consumer Law Center and SBPC found that more than 2 million borrowers had been repaying their student loans for more than 20 years. If these borrowers had been on income-driven repayment and it was functioning smoothly many likely would have been eligible to have their loans canceled. However, just 32 borrowers had had their loans canceled under income-driven repayment <\/strong>at that time.<\/p>\n Advocates and borrowers have complained for years that servicers weren\u2019t providing borrowers with enough or the right information to ensure they had access to income-driven repayment and stayed on the plans through to forgiveness. The Department of Education is taking steps to fix errors created by servicers\u2019 challenges keeping track of borrowers\u2019 progress towards cancellation on income-driven plans.\u00a0<\/p>\n Still, where five or <\/strong>10 years ago, advocates, policy wonks and borrowers may have been more bullish on the potential of an revamped income-driven repayment plan to help borrowers, \u201cthe public and advocacy groups have moved far beyond just fixing IDR,\u201d said Natalia Abrams, the president of the Student Debt Crisis Center.\u00a0<\/p>\n Now, they\u2019re advocating for bolder steps like debt cancellation and indeed, the Biden administration has acknowledged that the new SAVE plan isn\u2019t a substitute for mass debt relief and is taking another stab at mass student loan forgiveness. Fundamentally, both advocates who want to see broader solutions to the student debt crisis and critics who worry about the cost of the student loan program to the government say the SAVE plan continues the march down the path towards relying on loans to pay for college.\u00a0<\/p>\n \u201cThis is leaning into the debt financing framework that we currently use,\u201d Berkman-Breen said.<\/p>\n Jason Delisle, \u00a0a nonresident fellow at the Urban Institute, said the new plan could make taking on loans more attractive for some borrowers, particularly those pursuing low cost degrees at a place like community college, because they\u2019d pay so little over time and have the balance forgiven sooner than in previous plans.\u00a0<\/p>\n \u201cTaking a loan is not a slam dunk in that it\u2019s just going to become a grant,\u201d said Delisle, who has questioned the design of the income-driven plan and expressed concern about its possible unintended consequences. \u201cThis new plan will move it a lot closer to that.\u201d\u00a0<\/p>\n Other critics have worried that because borrowers with the lowest incomes will get some of the biggest benefits from the plan, it could subsidize schools where students earn low-paying degrees. The Biden administration is in the process of creating a rule that would crack down on career preparation programs that don\u2019t lead to jobs that pay enough for borrowers to service their debt.\u00a0<\/p>\n Marshall Steinbaum\u2019s research on borrowers between the ages of 18 and 34 and who had a positive student loan balance in 2009 indicates that already a large share of millennial borrowers don\u2019t repay their student debt in 10 years. Steinbaum, a senior fellow in higher education finance at the Jain Family Institute, found that by 2019 almost half of these borrowers owed more than they did in 2009 and a quarter owed at least twice as much.\u00a0<\/p>\n The interest benefit provided by SAVE will mean that going forward borrowers in a similar position won\u2019t see their balance go up in the same way. Still, Steinbaum said he expects the new plan will continue the trajectory of many borrowers not repaying their debt.\u00a0<\/p>\n \u201cWe have a student debt crisis that no one, at least to my understanding, has a good idea of how to solve at the root of it,\u201d he said. \u201cEverything else that we\u2019re talking about dealing with the back end of repayment or non repayment is kind of downstream of the policy failure.\u201d\u00a0\u00a0<\/p>\n In the more immediate future, some advocates are concerned about borrowers\u2019 ability to access the benefits of the plan as payments resume this fall. An unprecedented 28 million borrowers will be entering repayment at the same time. Meanwhile, the Office of Federal Student Aid, which oversees the loan program, is coping with a budget crunch after Congress didn\u2019t fully fulfill its request for funding. One of the consequences: the agency is paying servicers less and they\u2019ve slashed their customer service hours.<\/p>\n The SAVE Plan is the latest version of repayment help that\u2019s been available for decades<\/strong> <\/h2>\n
Balances won\u2019t grow, even if the monthly payment is too low to cover the interest<\/strong><\/h2>\n
Not \u2018a silver bullet\u2019<\/strong> <\/h2>\n
Advocates want bolder action than changing income-driven repayment plans<\/h2>\n