You’ve probably noticed that student debt cancellation has been in the news a lot lately. Recent efforts by the White House to wipe out student loans for millions of Americans have been met with a mix of enthusiasm and resistance. So what’s behind this debate?
The last 20 years have seen the mounting of a student debt crisis. Collectively, Americans owe well over $1 trillion in federal student loans. For many borrowers, the process of repayment has been burdensome, even financially debilitating. Until only recently, there has been little movement toward meaningful student debt relief. But a combination of events have thrust the issues of student debt cancellation into the political spotlight.
First, the COVID-19 pandemic triggered a temporary suspension of student loan repayment for millions of borrowers. As many borrowers weathered school closures, loss of income, health crisis, and other personal and financial hardships. millions of dollars in student debt hung in the balance. In the midst of this temporary suspension of repayment and interest accrual, the Biden administration took office and began its efforts to make some of this student debt relief permanent.
While cash-strapped college students, underemployed graduates, and financially struggling non-graduates alike have held out hope for long term student loan forgiveness, the Biden administration has been met with considerable resistance by its political opponents. In late July 2023, this resistance took the form of a Supreme Court decision scuttling the Biden administration’s plan for widespread student debt cancellation.
This comes as many borrowers stare down the barrel of repayment plan resumption. As a result, countless young Americans today find themselves in a state of uncertainty. Will the Biden administration’s Department of Education find another path to federal student aid forgiveness as it has pledged? With countless millions now bracing for October–when monthly payments resume–is there any immediate student loan debt relief on the table? And are there any additional steps you can take to reduce your own student debt burden?
We’ll do our best to bring you up to speed on the hot-button student debt relief issue
Student Debt Crisis
First, let’s get a little background on the student loan issue. Some critics of the recently proposed debt relief and debt cancellation proposals argue that borrowers should be held responsible for their financial obligations. And it’s true that historically, there is little precedent for forgiving student loan debt outright unless a college or university has been found guilty of corruption or financial mismanagement.
Then again, there is little precedent for the severity of our current student debt crisis.
The reality is that the size of our collective student debt is large enough to take a toll on the economy in much larger and more systematic ways. That’s because–according to the Federal Reserve Bank of New York–more than 45 million Americans will owe a combined $1.6 trillion in student loan debt by the end of 2023.
CNN reports that “In the 2020-2021 academic year, the College Board found that 51% of students who graduated from public four-year institutions left with federal debt averaging more than $21,000 per person. That figure is slightly higher for those who went to a private institution, with 53% graduating with federal debt averaging more than $22,000.”
According to a study by the Council on Foreign Relations, the average student is taking on more debt today than just a few years ago, with the balance per borrower going up by a full 25% between 2009 and 2021. The reason for this rising individual debt isn’t hard to understand. The cost of college tuition has risen dramatically during that time, far outpacing the growth of income across the board. CNN notes that students attending a public four year college in 1968-1969 paid roughly $1,545 for a year of tuition. That modest price included tuition, fees, and housing!
The National Center for Education Studies says that the same commodity was going for $29,033 during the 2020-2021 school year. If the cost of college tuition fell in line with the actual rate of inflation, that year of tuition at a public university would cost about $12,000 per year.
However, as the Council of Foreign Relations explains, higher education costs in the U.S. continue to rise dramatically beyond what the same opportunities cost in other countries. Even still, states have curtailed the funding of their own public universities. Naturally, they have passed on the added expense to their students.
And all of this is undermining the core value proposition of a college degree, which is to achieve a meaningful return on that investment through career opportunities, professional advancement, and heightened salary potential. This is why, according to the CFR, “Some recent research found that although a college education still provides a boost in earnings, the increase in wealth a degree provides has declined significantly over the past fifty years, due to the rising cost of college and the increase in other forms of consumer debt.”
Of course, with college debt itself exceeding all other forms of debt, excluding home mortgages, student debt does constitute a unique economic hardship for both individuals and the economy writ large. These are the circumstances under which President Biden initially pledged to wipe out student debt for millions of Americans.
The Original Biden Plan
During his run for the presidency in 2020, Joe Biden promised that his administration would roll out aggressive measures aimed at bringing permanent relief to middle class borrowers. In many ways, the timing would have seemed ideal. Millions of borrowers have been in something of a holding pattern since the onset of the pandemic.
At the time, monthly payment plans were paused and the vast majority of borrowers with federal loans were given a temporary reprieve from making loan payments or accruing additional interest. This provided a perfect inroad for the Biden administration to provide debt relief on a more permanent basis. The result was an initial plan that would have forgiven loan balances for roughly 43 million borrowers, ultimately canceling $430 in student loan debt.
The Biden Administration also undertook efforts to expand the Public Service Loan Forgiveness program and address shortcomings and errors in the application process that might have prevented otherwise eligible borrowers from qualifying for Income Driven Repayment Plans.
Taken together, these loan cancellation and forgiveness efforts would have been among the most expensive executive actions in U.S. history, says the New York Times. It would also have given a sense of relief to the millions of Americans who have anxiously awaited news on their outstanding debt.
It was the cost, however,that triggered strong reactions from conservative lawmakers and, as the Court’s ruling would demonstrate, members of the judiciary. Opponents argued that the enormous price tag of the loan forgiveness would have a negative impact on the U.S. treasury, give the Department of Education an undue amount of control over a significant portion of the nation’s economic resources, and ultimately represent a on overcorrection relative to the actual economic toll taken by student loan debt.
The recent Supreme Court decision suggests that it was at least this final condition that ran afoul of legal precedent.
The Supreme Court’s Ruling
Following up on his campaign promise, in August of 2022, President Biden began rolling out the details of a student debt relief program that would cancel college debt for millions of young Americans. The administration indicated its intention to facilitate the legislation through executive order and using the terms facilitated by the HEROES Act (which we will take a closer look at hereafter).
Under the terms of the Biden administration’s proposed loan forgiveness program, according to Nerdwallet, “federal student loan borrowers who meet income requirements [would] see up to $10,000 in debt canceled. If the borrower received a Pell Grant to attend school, the forgiven amount rises to $20,000. As of Nov. 3, nearly 26 million [had] already applied, according to the White House, and 16 million requests [had] been approved.”
However, the executive order also prompted litigation from several states, led by the state of Nebraska They made the argument that the loan forgiveness program would negatively impact the right of the named states to collect on debts to which they were rightfully entitled. The states argued that they had the right to sue the Department of Education for its efforts to forgive loan balances that were not its debts to forgive.
The Supreme Court agreed with them.
The Department of Education, under Biden, argued that the HEROES act, passed in 2003, provided the legal basis for his use of executive authority here. According to Reuters, “The administration said the plan was authorized under a 2003 federal law called the Higher Education Relief Opportunities for Students Act, or HEROES Act, which lets the education secretary ‘waive or modify’ student financial assistance during war or national emergencies.”
While both the Biden administration, and the Trump administration before it, invoked the HEROES act numerous times to suspend student loan repayment obligations during the pandemic, the Supreme Court viewed Biden’s latest invocation of the statute as executive overreach.
On June 30th, 2023, the Supreme Court struck down the Biden administration loan forgiveness plan by a 6-3 vote. Chief Justice John Roberts wrote the majority opinion, in which he stated “We hold today that the Act allows the Secretary to ‘waive or modify’ existing statutory or regulatory provisions applicable to financial assistance programs under the Education Act, not to rewrite that statute from the ground up.”
In the view of Chief Justice Roberts, the Biden Administration was attempting to leverage a limited executive privilege well beyond its initially intended usage. Speaking derisively of Secretary of Education Miguel Cardona, Justice Roberts asserted that , “From a few narrowly delineated situations specified by Congress, the secretary has expanded forgiveness to nearly every borrower in the country,”
In her dissenting statement on the final vote, Justice Elena Kagan argued that, quite to the contrary, the HEROES statute quite clearly granted the exact executive authority deployed by the Biden Administration here. Kagan explained that “The majority’s ‘normal’ statutory interpretation cannot sustain its decision. The statute, read as written, gives the Secretary broad authority to relieve a national emergency’s effect on borrowers’ ability to repay their student loans.”
And what of that ability?
Today, millions of Americans are left to grapple with a debt that many were promised would be wiped out. Indeed, the court’s decision was a big hit to the Biden administration, especially as the incumbent prepares to defend the Oval Office against a Republican challenge in the coming calendar year. The hit was even bigger for the 26 million who had applied for debt relief following the Biden administration’s August rollout. Some 16 million had already received approval for loan forgiveness.
Now, in light of the Supreme Court decision, that approval carries no real meaning.
With Americans below the age of 30 significantly more likely to carry burdensome student debt, a generation which has already been saddled with a Great Recession and a global pandemic must now find its way forward with little guarantee of institutional relief. Indeed, while the Supreme Court came to the conclusion that the loan forgiveness initiative fell short of legal muster, evidence suggests that the majority of Americans–53% of respondents to a March Reuters/Ipsos U.S. poll–supported the debt relief plan.
The President chided his Republican opponents for obstructing efforts to bring debt relief to young borrowers. He noted that “They had no problem with billions in pandemic-related loans to businesses – including hundreds of thousands and in some cases millions of dollars for their own businesses,”
Biden’s Plan B
In spite of the setback, the Department of Education is continuing its push for debt relief on other fronts. The President has said that the Secretary of Education has been instructed to explore alternative pathways to debt relief, especially for low and middle income borrowers struggling to meet their repayment plan obligations.
Among these alternative pathways, Secretary Cardona noted that the Department of Education has recently completed its work in updating the rules surrounding the income driven repayment plan (IDRP) option. This plan, according to Cardona, would have three distinct benefits for borrowers.
First, it would eliminate monthly payments altogether for most or all low-income borrowers, bringing their debt obligation to zero. Second, for most other borrowers, the measure would save up to $1000 a year by adjusting monthly payment obligations downward to match actual income levels. Third, the updated rules would prevent “runaway interest,” which occurs when a borrower falls behind on payments until interest charges ultimately outweigh the principal balance.
The Department of Education’s efforts to update the IDRP option have so far been met with little meaningful resistance. And in fact, in the weeks following the Supreme Court’s decision, the Department of Education also revealed that it had corrected a number of errors in the way that qualified monthly payments have been counted toward repayment of a given borrower’s loan balance.
The Department has said that, in recent years, borrowers who might have been eligible for IDRP plans, instead “fell through the cracks of a broken system.”
The corrections to the way that payments are calculated, the administration revealed in July 2023, will positively impact more than 804,000 borrowers. Collectively, these eligible borrowers will see $39 in debt canceled.
Also, in light of the recent Supreme Court Decision, the Department of Education has announced its intention to ease borrowers back into loan repayment at their own pace. According to Secretary Cardona, the Department of Education “will provide a 12-month transition period to help borrowers successfully return to repayment without falling into delinquency or default. It will help borrowers avoid the harshest consequences of missed, partial or late payments like negative credit reports and having loans referred to collection agencies.”
Still, the fact remains that millions of borrowers who spent the last several years waiting on the promise of relief are now exploring their alternatives. While some are considering their eligibility for other existing forgiveness programs, many others still are simply preparing for the impact this will likely have on household budgets. And for some households, that impact may well be profound.
Indeed, no matter what steps the Biden Administration succeeds in taking next, the timeline is much tighter for those anticipating the resumption of monthly payments. And in fact, for those who completed college or graduate school in the midst of the pandemic, this coming change may well represent the very first time that many are making any kind of payments on their loans.
In other words, this could significantly change the short-term financial outlook for young Americans already living on a tight budget.
If you are one of millions of young Americans grappling with student loan debt and anticipating the upcoming resumption of monthly payments, now might be a good time to think about a debt consolidation loan. This could help reduce your interest payments, simplify your repayment plan, and improve your credit score. To learn more, check out our article on debt consolidation loans.