July 3rd, 2023 7:00am PDT
(PenniesToSave.com) – In a ruling that had been eagerly awaited, the U.S. Supreme Court has deemed President Biden’s comprehensive plan to forgive all or a portion of federal student loan debt for millions of Americans as invalid.
In a 6-3 vote, the Supreme Court ruled that the Biden Administration does not have the authority, according to a 2003 federal law, to cancel hundreds of billions of dollars in student debt.
As per the ruling, the HEROES Act gives the Secretary of Education the authority to “waive or modify” current provisions related to financial aid programs outlined in the Education Act. However, it does not empower the Secretary to entirely eliminate $430 billion in student loan principal.
The decision, authored by Chief Justice John Roberts, favored Missouri and five other states. These states argued that the Administration had gone beyond its authority by forgiving specific student loans.
Roberts highlighted that the Department of Education’s changes led to a distinctive and substantially altered loan forgiveness program, ultimately extending forgiveness to nearly all borrowers nationwide.
After a year filled with uncertainty for federal student loan recipients, there have been recent developments regarding the matter. In August, President Biden announced that the U.S. government is considering eliminating up to $20,000 in debt for individuals who received a Pell Grant for college, and up to $10,000 for most other borrowers. This ruling brings further progress in addressing the concerns of student loan holders.
After several months of speculation, the president’s announcement in August was met with enthusiasm from younger voters and likely contributed to the Democrats’ better-than-expected performance in the midterm elections. However, the proposal faced legal challenges from Republicans and eventually required intervention from the Supreme Court.
As the court’s decision sparks ongoing discussions, it’s important to grasp five key points that shed light on its implications for borrowers and the nation as a whole.
A sense of collective disappointment is being felt by millions of borrowers
If Biden’s proposal had been enacted, about 43 million individuals who have federal student loans would have received relief. This represents approximately one in eight Americans. And out of those borrowers, nearly 20 million people could have had their student loans completely eliminated.
Regardless of whether one agrees with Biden’s plan, it is important to acknowledge the clear and widespread disappointment and, perhaps, disillusionment felt by many Americans currently.
Derrick Johnson, the President and CEO of the NAACP, expresses his disappointment with the Supreme Court’s decision to leave millions of borrowers trapped in an endless cycle of debt. He finds it disheartening that while the country provides financial assistance to Fortune 100 companies and bail out banks with questionable practices, such actions are allowed while borrowers continue to suffer.
Before the court made its ruling, Johnson wrote a letter to President Biden, offering advice on exploring potential legal options to alleviate student loan debts in case the decision was not favorable.
Johnson emphasized the need for immediate and decisive action following an unfavorable court ruling, stating that without such action, the Administration runs the risk of disillusioning Black voters who were expecting important campaign promises to be fulfilled. Additionally, failing to take action could perpetuate racial wealth disparities.
Borrowers will soon face the resumption of loan repayments
The situation poses a significant challenge for many individuals. Countless borrowers who had anticipated the partial or complete forgiveness of their federal student loans will now be obligated to commence repayment.
Borrowers are required to resume their student loan payments by the end of August, as mandated by recent legislation aimed at preventing a federal government default on its debts. The Biden Administration had already committed to a similar timeline prior to this legislation.
According to a spokesperson from the Education Department, student loan interest will begin again on September 1st, and payments will be due starting in October.
The problem arises from the fact that many borrowers have become accustomed to not making payments, and for many, they have never had to make a student loan payment before. Data from the federal government shows that approximately 7 million borrowers of federal student loans are 24 years old or younger. This means that they were at most 21 years old when the payment pause began in March 2020, and in many cases, still in college.
Complicating matters further, many older borrowers will be transitioned to a new loan servicing company. In addition, some may have forgotten their passwords for the online portal and others may not have checked their account balances in months or even years. However, these circumstances will soon be addressed and resolved.
The restart presents the biggest challenge for borrowers who were granted a chance to start anew during the pandemic. Around 7.5 million defaulting borrowers are offered safeguards against involuntary debt recovery and the opportunity to restore access to flexible repayment plans. However, in order to benefit from this program and exit default, these borrowers must actively choose to opt-in and proactively communicate with their loan servicer.
According to the department, the borrowers who have defaulted are often economically vulnerable and typically first-generation college students. Advocates express concern about the department’s effectiveness in communicating these repayment opportunities to borrowers in default, as well as their willingness to resume repayment after years of default.
These concerns arise from previous reporting by NPR in January. NPR’s report uncovered funding shortages in the Federal Student Aid (FSA), which is responsible for managing the government’s student loan portfolio.
As more borrowers are entering the system, both FSA and loan servicers will face an overwhelming influx of cases. However, instead of increasing resources to meet this demand, the agency is actually reducing costs and services. This decision further compounds the challenges they already face.
Student loan debt is growing
The issue of escalating student loan debt, fueled by the increasing expenses of college, would have remained unresolved even with Biden’s extensive plan for debt relief. The government will persist in offering loans to aid individuals in financing their higher education, while colleges continue to escalate tuition fees, resulting in borrowers taking on even more loans.
The cost of college education has almost doubled when adjusted for inflation since 1990, going from around $15,000 per year to $29,000 in 2020. To meet these rising expenses, students heavily rely on loans. Between 1995 and 2017, the amount of federal student loan debt increased more than sevenfold, skyrocketing from $187 billion to $1.4 trillion (in 2017 dollars), as reported by the nonpartisan Congressional Budget Office.
To address this systemic issue, the Biden administration has put forth a plan that focuses on implementing a more lenient income-driven repayment plan. This proposal has received positive feedback from borrower advocates while facing criticism from Republicans.
There is still uncertainty about when borrowers will have access to this new plan, even if the administration successfully implements it.