The Supreme Court’s recent ruling on federal student loan debt forgiveness has caused a wave of uncertainty across the nation regarding the future of student loan debt relief. What does this mean for current and future college students who may be considering taking out federal loans?
Credit: USA Today
On June 30th, 2023, the Supreme Court released a litany of rulings concerning issues in higher education, such as affirmative action (read our breakdown on that ruling here). One of the most contentious and pressing issues that was ruled on was the issue of federal student loan debt forgiveness, which affects an estimated 43.6 million Americans who have federal student loan debt.
If you are a current high schooler or parent of a high school student, you are probably wondering how this could affect you as you or your child approaches college applications — and we’re here to help. We’ve covered this topic in two recent blog posts about Biden’s original student debt relief plan and then an update as the case was in motion, but given this landmark decision and impending workaround from the Biden administration, there are a lot of new things to discuss in the arena of federal student loan programs.
Student loan relief is becoming an increasingly important topic as the cost of higher education is steadily increasing, possibly meaning that more families will incur economic hardship to ensure their loved ones can attend the college or university of their dreams. Need-based financial aid can be hard to come by, so federal and private student loans do seem like viable options for many. However, longer-term plans must be made during the college application process to ensure that undergraduate loans (and potentially graduate loans in the future) will be able to be paid off.
Read on to learn more about the Supreme Court’s decision about federal student loan forgiveness.
What are the different types of student loans?
Student loans are loans students take out to cover the costs of higher education, and they can be offered to students as part of a financial aid package. Students and families have two options when it comes to student loans: federal loans or private loans. The loan amount, term, repayment options, monthly payments, and interest options can vary based on the type of loan.
Federal loans: As the name suggests, federal student loans are offered by the federal government and have a fixed interest rate that is set at the beginning of every year. There is also an origination fee that can vary based on the amount you’re borrowing. Loans for undergraduate students that are offered based on demonstrated financial needs are Direct Subsidized Loans, and loans awarded not based on financial need are known as Direct Unsubsidized Loans. There are also Direct PLUS Loans for graduate students and Direct Consolidation Loans, which allow students to combine their loans.
Private loans: Private student loans, as suggested by the name, come from a private entity, like a company or private loan servicer, and usually have a variable interest rate that is different from that of federal loans. Because they require a credit check and most students do not have an established credit history, these loans often require a cosigner. Private loans are not affected by the ruling on federal student loan payments.
Federal loans are affected by the Supreme Court’s decision, whereas private student loans are not.
The Supreme Court’s Decision on Student Debt Forgiveness
During the pandemic, monthly payments for federal student loans were temporarily paused due to the extraordinary circumstances (and also as part of a plan for an economic jumpstart to encourage Americans to spend their discretionary income on consumer goods). Although these monthly payments were set to resume in January 2023, the Biden campaign had made a promise to continue to lessen the burden of student debt for the millions of Americans who had yet to pay back their federal loans. Many activist groups saw this as a chance to campaign for the government to simply cancel the $1.78 trillion that Americans owned in federal student loans.
The case, Biden vs. Nebraska, was originally brought by a coalition of six conservative-led states — Arkansas, Iowa, Kansas, Missouri, Nebraska, and South Carolina — arguing that Congress should have approved any student loan debt cancellation plan and that the Biden administration and the US education department were abusing emergency authority.
President Biden’s plan involved using the HEROES Act, passed in the aftermath of the attack on the World Trade Center in 2001 to lessen the economic hardship of those affected by such a catastrophe. This would’ve allowed for up to $20,000 in federal student loans to be forgiven per borrower, but the Supreme Court blocked this proposition by a 6-3 vote. This means that many borrowers could find themselves unable to pay off their federal student loans and in the very near future — with no relief in sight.
In his majority opinion, Chief Justice John Roberts agreed with the plaintiffs, writing on behalf of the other five judges in dissent that the HEROES Act language was not specific enough to warrant total forgiveness of federal loans. He wrote that the court’s precedent “requires that Congress speak clearly before a department secretary can unilaterally alter large sections of the American economy.” Thus, Biden’s original student loan debt relief plan swiftly came to an end — but his administration’s intent to lessen the burden of student loans is by no means over.
Biden’s Response to the Supreme Court Ruling
In response to this ruling, President Biden has proposed a new plan to invoke the 1965 Higher Education Act, which some experts have said gives the Education Department broad authority (not dissimilar to the HEROES Act, implying it might face similar legal challenges). It may take some time to take effect and will likely encounter legislative challenges, but eventually, this could provide some debt relief for those struggling with debt from federal student loans and late payments and/or defaulted loans.
The proposal seeks to increase access to income-driven repayment plans and allows borrowers to pause monthly payments without penalty between October 2023 and 30 September 2024, meaning a borrower’s credit score will not suffer if they miss monthly payments during this period. That way, student loan borrowers could pursue a more affordable repayment plan with even less penalty than the current income-based repayment plans allow.
Currently, according to the Federal Student Aid website, your payment amount under an income-driven repayment plan is a percentage of your discretionary income. The amount varies based on the income-based repayment plan:
- REPAYE Plan: Generally 10 percent of your discretionary income.
- PAYE Plan: Generally 10 percent of your discretionary income, but never more than the 10-year Standard Repayment Plan amount
- ICR PLAN: The lesser of the following —
- 20 percent of your discretionary income or
- what you would pay on a repayment plan with a fixed payment over the course of 12 years, adjusted according to your income
- IBR Plan:
- Generally 10 percent of your discretionary income if you’re a new borrower on or after July 1, 2014*, but never more than the 10-year Standard Repayment Plan amount
- Generally 15 percent of your discretionary income if you’re not a new borrower on or after July 1, 2014, but never more than the 10-year Standard Repayment Plan amount
It also provides an option for those student loan borrowers who have defaulted loans to rehabilitate their federal loans. This new plan would include these options while including more room to pause monthly payments without punishment from credit reporting agencies.
While this proposal is not a direct form of complete federal loan forgiveness, it does provide some hope for those struggling with student loan debt and could be a stepping stone towards more generous student loan debt relief policies in the future. It’s unlikely, given the political controversy around the idea of federal student loan payments and lobbying on behalf of student loan servicers, that entire debt cancellation is imminent for those making monthly payments, but it’s not completely impossible.
How does the Supreme Court ruling affect current and future college students?
Of course, in the immediate aftermath, this decision will only affect students who have already taken out federal loans, especially those who have taken advantage of the pause on monthly payments, as well as students who are looking to take out federal loans.
Most of these people fall within the age range of 25-61, with the age group of 35-49 owing the most in federal student loan payments — totaling a whopping $634.2 billion. A large amount of this debt is likely from accrued interest and fines on late monthly student loan payments. While younger students are currently less affected, Americans under 35 typically are responsible for more late payments than their older counterparts and have higher delinquencies on all types of loans than other age groups.
As Marshall Steinbaum, an economics professor at the University of Utah and a senior fellow in higher education finance at the Jain Family Institute, told Vox: “Many borrowers in this age group have balances that are so high, they may end up stuck in a cycle of just paying their interest without ever making progress in paying down the principal.” This has become one of the most hotly-debated issues in the student debt realm, as interest rates have risen to the highest we’ve seen in decades — up to 5.50% for the 2023-2024 school year, according to Nerdwallet.
It’s important to keep in mind that the Supreme Court ruling only applies to federal student loans. Private loans from student loan servicers are still subject to different regulations, and federal student loan borrowers should contact their respective student loan servicers if they need help managing their payments due to economic hardship.
If you are currently struggling to repay your federal loan and are looking for some kind of debt relief, you can possibly pursue an income-driven repayment plan as described above, “which sets your monthly student loan payment at an amount that is intended to be affordable based on your income and family size,” according to the Federal Student Aid website. This requires filling out an online application and could be an easy way to avoid late payments and/or a defaulted loan.
It’s also wise for prospective students to take a look at other funding sources, like private scholarships and pell grants from the federal government or pell grant programs run by individual states, that students are not required to pay back. Even if loans are your only option, you can choose the type of loans, either private student loans or participating in federal student loan programs, that works best for your financial situation. Make sure to note the interest rates offered and the possibility of creating a more affordable payment plan if necessary post-graduation.
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For current and future college students who may be considering taking out loans, it’s essential to understand the implications of the Supreme Court ruling as well as Biden’s new plan. It’s also important to explore other options for financing one’s education, such as scholarships and grants. While Biden’s proposal is not a direct form of loan forgiveness, it does provide some hope for those struggling with student loan debt and could be a stepping stone towards more generous policies in the future.
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