Student loans are becoming the second biggest slice of household debt, after mortgages. And the federal government is facing significant challenges in implementing a host of borrower-focused initiatives.
Some initiatives could be postponed or cut altogether. Others may face legal challenges.
1. Biden’s Student Loan Forgiveness Plan
President Biden’s student debt forgiveness plan faces a flurry of legal challenges that could ultimately squash it altogether. The Supreme Court is set to weigh in on the program next year.
It would forgive up to $10,000 in federal student loans for borrowers earning up to $125,000 ($250,000 for married couples) and up to $20,000 for Pell Grant recipients. It also includes a new income-driven repayment (IDR) plan that could reduce monthly payments for millions of borrowers.
But before the plan can get off the ground, it will need to win a Supreme Court challenge that is likely to be heavily influenced by conservative justices. The challenge is from six states, led by Nebraska, who argued that the plan oversteps Congress’ authority and threatens the revenue of state-based loan servicers.
2. New Income-Driven Repayment (IDR) Plan
The Biden administration is proposing a new version of the income-driven repayment plan that could help millions of student borrowers. Under the proposal, borrowers will make reduced payments for 20 years (or 10 years under Public Service Loan Forgiveness) and then their debts will be forgiven.
This new plan is an improvement on the Revised Pay As You Earn (REPAYE) income-driven repayment plan that is currently available. Under the current plan, borrowers make monthly payments based on their discretionary income, which is the difference between their annual income and 150% of the federal poverty guideline for their family size and state of residence.
However, a recent study found that borrowers who use the REPAYE plan often struggle to afford their monthly payments. They face administrative barriers, like insufficient information and unclear eligibility requirements. And, despite having lower incomes, some borrowers have debt levels that are unaffordable under the plan. The new proposal would eliminate these barriers, ensuring that all borrowers can benefit from the plan.
3. Extension of Payment Pause
In order to help alleviate uncertainty for millions of borrowers, the Department of Education announced on November 22 an extension of the student loan pause on payments, interest, and collections. The pause will last until June 30, 2023.
During the pause, all payments will be deferred and interest rates will remain at 0%. Payments made during this time will count toward income-driven repayment (IDR) forgiveness and Public Service Loan Forgiveness as long as you meet other qualifications.
While the pause may provide relief to some borrowers, it also carries a large cost. According to a recent analysis, the pause costs at least $5 billion per month and delivers little benefit to low-income borrowers, while providing the bulk of benefits to high-income borrowers.
While the pause is rooted in legal authority tied to the Covid-19 pandemic emergency, there are many questions about its legal standing and whether this national emergency will be resolved before the pause ends. Regardless, the pause has been a lifeline for many borrowers.
4. Borrowers Cancelled from ITT Technical Institute
Those who attended ITT Technical Institute, which shut down in September 2016, are getting their loans automatically canceled. The Biden administration announced the move Tuesday, and it will cancel $3.9 billion in student loan debt for 208,000 former borrowers.
The Department of Education found that ITT misled students about their job prospects, transferability of credits and accreditation. They also pushed students to take out loans that were risky.
ITT Tech was one of the country’s largest for-profit college chains, with more than 130 campuses across 38 states. The company promoted its degrees in business, computer engineering and cybersecurity as a way to make money or find a better job.
A slew of federal investigations into the company’s recruitment and loan practices resulted in the closure of ITT Tech, which ED banned from accepting new students. It’s the latest in a series of actions aimed at ending the nation’s widespread abuses by for-profit colleges. This round of cancellation is for all borrowers who attended ITT between January 2005 and its closure in 2016. Borrowers who have not filed for a borrower defense to repayment discharge will have their loans automatically wiped away.
