Student Loan Forgiveness Update – December 21, 2022

What started off as some of the greatest news of 2022 for millions of federal student loan borrowers looks as if it will carry over into the new year with uncertainty. President Biden’s student loan forgiveness plan appears to be in a deep freeze. The Department of Education has a court order to pause moving forward with providing the 26 million Americans who’ve already applied for up to $20,000 in one-time debt cancellation.

So why can’t Biden’s plan move forward, and are federal student loan payments going to resume on January 1st as we were warned? Here’s the latest on student loan forgiveness.

 

Student Loan Lawsuit Update

Since Biden’s August 24th announcement, student loan forgiveness has faced plenty of lawsuits. The grand majority of them have been dismissed in the lower courts. However, two suits have gained traction and will now be heard by the Supreme Court. If the judges agree with the plaintiffs, they could potentially threaten to dismantle the program entirely. Here are suits that will be considered. 

Nebraska v. Biden

In the first case, Nebraska v. Biden, six Republican-led states (Arkansas, Iowa, Kansas, Missouri, Nebraska, and South Carolina) claim that Biden’s one-time student debt cancellation will decrease state tax revenues and hurt state-based loan agencies. While the White House has fired back with counter arguments, a federal court ultimately issued a temporary injunction which is what has led to the pausing of Biden’s student debt cancellation. 

Brown v. U.S. Department of Education

In another lawsuit filed by the Job Creators Network Foundation (a conservative advocacy organization) and two residents of Texas, Judge Mark Pittman ruled on November 10th that the student loan debt relief program was unconstitutional. His position is that Biden does not single-handedly have the authority to grant widespread debt relief.

As written by Judge Pittman

“The HEROES Act — a law to provide loan assistance to military personnel defending our nation — does not provide the executive branch clear congressional authorization to create a $400 billion student loan forgiveness program. The Program is thus an unconstitutional exercise of Congress’s legislative power and must be vacated.”

From the White House’s perspective, the U.S. has been operating under an emergency declaration since March 2020 in response to the coronavirus pandemic. The Biden administration insists that the Heroes Act of 2003 grants the Department of Education the authority to waive regulations related to student loans during national emergencies when relief is necessary.

Yet, it may seem as if the Supreme Court judges will not agree. According to Dan Urman, a law professor at Northeastern University, he believes the conservative justices will most likely rule against Biden citing government agencies exert too much authority and “violate the separation of powers.”

 

What Happens If the Courts Rule Against Student Loan Relief?

Unfortunately, if the Supreme Court decides Biden’s student loan relief initiative is unconstitutional, then the program as we know it will be dead. However, that will likely not be the end of the story.

Looking back at Biden’s August 24 speech, in addition to one-time debt cancellation, there was also a promise to create a new version of an IDR (income-driven repayment) plan. There are already several IDR plans in existence and although each is different the primary goal is to reduce the borrower’s payment based on their income and family size. The typical arrangement is that the borrower only makes these reduced payments for the next 20 to 25 years, and afterward, any remaining balance will be forgiven. 

While these plans have been around for several years, they’ve often been criticized for being too complicated. Only about 30 percent of all federal student loan borrowers are enrolled in the current IDR plans.

This latest version of the IDR plan would be more streamlined and offer more opportunities to pay less. For example, one proposal is to raise the amount of income that’s considered non-discretionary to 225% of the federal poverty level (up from the current 150%). This means that a single borrower earning approximately $15 per hour could qualify for an IDR plan with a $0 monthly payment.

The Biden administration has not yet released the details of this new IDR plan, and this may be intentional. It could be speculated that if the promise of one-time debt cancellation gets killed by the Supreme Court, then the recourse for the White House would be to tweak the rules of the new IDR plan to be even more generous than originally planned. Of course, no one knows and we’ll likely have to wait for the Supreme Court’s decision before we find out for sure.

Payment Pause Extended Again

Also as a result of these lawsuits, the White House has once again decided to extend the federal student loan payment freeze. During Biden’s August 24th announcement, it was declared that this freeze would be extended one last time through December 31st, 2022 and that there would be no further extensions. However, given the legal turmoil surrounding the one-time student debt cancellation, the Biden administration appears to have reconsidered.

Here is the statement posted on the Department of Education’s website:

“The student loan payment pause is extended until the U.S. Department of Education is permitted to implement the debt relief program or the litigation is resolved. Payments will restart 60 days later. If the debt relief program has not been implemented and the litigation has not been resolved by June 30, 2023 – payments will resume 60 days after that. We will notify borrowers before payments restart.”

Note that this is the eighth time that an extension has been made on the federal student loan pause. Borrowers have not been required to make a payment since March 2020, and their balances are also not accruing interest. Some experts believe that based on the wording of the Department of Education’s statement that this may be Biden‘s “Plan B” until a conclusion can be reached on the one-time student debt cancellation.

However, it should be noted that Biden’s authority to continue suspending federal student loan payments comes from the same declaration of national emergency which was effectively used to grant student loan forgiveness. If the Supreme Court rules that the White House is abusing its power, or if the COVID pandemic is ever officially declared over, then they would no longer be a basis to continue extending the student loan payment freeze.

If student debt cancellation continues to remain in limbo, then borrowers appear to have until at least September 1 (June 30 plus 60 more days) before they would have to make their first payment. This gives everyone approximately eight months to get their finances in order and prepare to begin making payments once again.