Biden’s Three New Student Debt Relief Initiatives, in Response to Student Loan Forgiveness Loss

After President Biden’s one-time student loan forgiveness plan was struck down by the Supreme Court last week, top administration officials and advocacy groups slammed the conservative majority that denied student debt relief to millions of borrowers. 

“We believe the Supreme Court got it wrong,” said Education Secretary Miguel Cardona in a statement. “President Biden and I recognize how critical student debt relief would have been for tens of millions of Americans and their families, and we understand many borrowers may be wondering how yesterday’s decision affects them…While we disagree with yesterday’s ruling, our Administration will not stop fighting to provide relief to borrowers who need it most, and we will use every tool at our disposal to do so.”

Cardona was not alone on this perspective. Jaylin Herbin, Director of Federal Campaigns at the Center for Responsible Lending said in a statement, “We strongly oppose the Supreme Court’s unsupported termination of President Biden’s student debt cancellation plan. The decision sets a dangerous precedent that allows third parties to assert legal standing, opening the door to more frivolous lawsuits against emergency policies designed to protect Americans, stimulate the economy and put more money in the pockets of hardworking borrowers. We urge President Biden to explore all his options, including using his executive and statutory authority, to provide student loan debt relief to the millions of Americans who will face increased financial insecurity when payments restart.”

Shortly after the Supreme Court issued its decision, President Biden outlined three ways that the administration will try to help borrowers in the coming months.

Biden administration working on new student loan forgiveness plan

First, President Biden indicated that he has directed the Education Department to start developing a new student loan forgiveness plan using different legal authority. Biden characterized the new plan as a “path consistent with today’s ruling.”

That new path will be forged via the Higher Education Act, a different legal authority than the HEROES Act of 2003, which was the basis for the plan that the Supreme Court struck down. The Court concluded that the HEROES Act was intended to be used for minor tweaks to existing federal student loan programs, not effectively establishing a brand new federal student loan forgiveness program. Notably, the three liberal justices, in their dissenting opinions, argued that this was a misreading of the plain text of the statute, calling into question their colleague’s commitment to the conservative legal principle of textualism. 

The Higher Education Act has its own provision allowing the Education Department to compromise and waive federal student loan debt obligations. This authority has been used to settle defaulted federal student loans and to establish group student debt relief, such as in the Sweet v. Cardona settlement over stalled Borrower Defense to Repayment claims. But it has never been used to establish a program on the scale of Biden’s original student loan forgiveness plan, and it will likely face its own legal challenges.

Unlike the HEROES Act, new programs under the Higher Education Act require a lengthy negotiated rule-making process involving hearings and public comments before new regulations can be drafted and enacted. So, even if the process moves fairly quickly, borrowers are unlikely to see any relief for months.

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Borrowers will have year-long reprieve from student loan default

Biden also announced that there would be a 12-month transition period after payments resume later this summer. During this year-long grace period that officials are calling an “on-ramp” period, borrowers will not be penalized for missing student loan payments after the student loan pause ends. This means that there will be no late fees, negative credit reporting or defaults.

However, interest will start accruing in September. And payments will become due in October. If borrowers miss payments during the 12-month on-ramp period, those months will not count toward student loan forgiveness under Public Service Loan Forgiveness and Income-Driven Repayment plans. 

“For borrowers who still cannot make their payments, we are creating a temporary ‘on-ramp’ period that will help borrowers avoid the harshest consequences of missed, partial, or late payments,” Education Secretary Miguel Cardona assured. “During that time, missed, partial, or late payments will not lead to negative credit reporting, default, or loans being sent to collection agencies. Borrowers who can make payments should do so, as payments will be due and interest will accrue during this transition period.”

New student loan repayment plan with faster loan forgiveness will be phased in

The Biden administration will also be phasing in elements of a new student loan repayment plan based on a borrower’s income. The plan largely mirrors the proposal that was first released in January; although, it will be called the “Saving on a Valuable Education” (SAVE) plan, rather than keeping the “Revised Pay As You Earn” (REPAYE) name.

Under this new plan, most borrowers – particularly undergraduate borrowers – will benefit from lower payments and interest subsidies. Borrowers with smaller balances can receive student loan forgiveness in as little as 10 years (although most borrowers will still be on a 20-year term). 

The plan will, “cut monthly payments to $0 for millions of borrowers making $32,800 or less ($67,500 for a family of four) and save all other borrowers at least $1,000 per year,” said Secretary Cardona in a statement. “Additionally, it will stop runaway interest that leaves borrowers owing more than their initial loan.”

Certain elements of the plan, including a larger poverty exemption and an elimination of negative amortization which occurs due to excess interest accrual, will go into effect this summer. Other aspects of the plan, including a more favorable repayment plan formula, automatic annual recertifications, and safe harbor provisions, will be available in 2024.