Explained | The U.S. student loan crisis and Joe Biden’s new cancellation plan

The Biden administration now plans on using the Higher Education Act to cancel $430 billion of the $1.7 trillion in student loan debt accrued so far 

Updated - July 04, 2023 01:46 pm IST

Published - July 04, 2023 12:25 pm IST

File photo: Jordan Braithwaite, 21, center, an undergrad at Grambling State University facing over $10,000 in student loans, demonstrates outside the Supreme Court, on Friday, June 30, 2023, in Washington. 

File photo: Jordan Braithwaite, 21, center, an undergrad at Grambling State University facing over $10,000 in student loans, demonstrates outside the Supreme Court, on Friday, June 30, 2023, in Washington. 

The story so far: United States President Joe Biden has already released a new plan to cancel billions in student loan debt after the conservative majority Supreme Court of the U.S. (SCOTUS) in a 6-3 decision on June 30 blocked his ambitious plan to cancel $430 billion in debt.

Although Mr. Biden has said the alternative plan is consistent with the Supreme Court ruling, it could still face a legal challenge, while the fate of millions of American borrowers — who may have to start repaying their loans once a pause on repayment lifts — hangs in the balance.

How big is the U.S. student loan debt?

As per the latest Federal Reserve figures, more than 45 million Americans owe a total of $1.77 trillion in student debt to the U.S. government. As per the Congressional Research Service (CRS), approximately 63% of the U.S. population over the age of 25 has at some time enrolled in some level of higher education and roughly 17% of the country’s population aged 18 or above has federal student loans. Meanwhile, the median student loan debt is just above $17,000.

Research by the nonprofit College Board suggests that over the past three decades, the cost of higher education has risen sharply in the U.S., doubling at private four-year colleges and universities and rising even further at public four-year schools. Between 2006 and 2019, the outstanding balance of student loans has nearly quadrupled.

In the U.S., the federal government is the primary source of student loans, running several loan programmes to help students and their families finance higher education.

These loans are authorised under Title IV of the Higher Education Act of 1965 (HEA). Under primary loan programmes, the U.S. government makes loans using federal capital, meaning funds from the U.S. Treasury Department, after which the outstanding loans become assets of the federal government.

What are repayment options for borrowers?

Once a student borrows a federal loan, they enter into a contractual obligation to repay the loan with interest. They can sign up for specific repayment plans, with repayment periods spanning a decade or more. Under a standard 10-year repayment plan, a borrower has to make 120 equal payments of principal and interest spread over a decade.

Then there are Income-driven repayment (IDR) plans, the kind that President Biden wanted to alter in order to cancel student debt. Such plans cap the monthly payment installments at a share of the borrower’s discretionary income, say 10%- 15%; extend the repayment period over a span of 20 or 25 years, and forgive or write off any unpaid principal and interest remaining after that period.

What was Mr. Biden’s original student debt cancellation plan?

The plan, announced in August 2022, was supposed to cancel $10,000 in federal student loan debt for those making less than $125,000 a year or households making less than $250,000. The recipients of the government’s Pell Grant, who usually need more financial assistance, were to get an additional $10,000 worth of their debt forgiven.

College students qualified if their loans were disbursed before July 1. The plan made 43 million borrowers eligible for some debt forgiveness, with 20 million possibly having their debt erased entirely, according to the Biden administration.

The White House said 26 million people had applied for debt relief, and 16 million people already had their relief approved. As per the Congressional Budget Office, the program would cost about $400 billion over the next three decades.

The Education Department also proposed to improve the existing income-driven plan mentioned above, capping monthly payments for undergraduate loans at 5% of a borrower’s discretionary income, down from the current 10%. The administration claimed that the plan would mean lowering of the average annual student loan payment by more than $1,000 for both current and future borrowers.

Why did the plan run into trouble?

There were two legal challenges to the plan which landed in the Supreme Court—one involving six Republican-led States and the other filed by two students.

In the case filed by the students, they argued, among other things, that the Biden administration didn’t go through the proper process in enacting the plan. Texas-based U.S. District Judge Mark Pittman, appointed by former President Donald Trump, opined that Mr. Biden overstepped his authority. To cancel the debt, the Biden government relied on the Higher Education Relief Opportunities for Students Act, commonly known as the HEROES Act, which was enacted in the aftermath of the 9/11 attack and allows the Secretary of Education to waive or modify terms of federal student loans during times of war or national emergency. The White House cited the COVID-19 pandemic as a national emergency.

The ruling, however, argued that the HEROES Act did not accord the Secretary the authority for mass debt cancellation. The judge said it only granted flexibility during national emergencies, adding that it was unclear whether debt cancellation was a necessary response to the COVID-19 pandemic, which Mr. Biden had by then declared as over.

As for the suit by the six States— Arkansas, Iowa, Kansas, Missouri, Nebraska and South Carolina— a lower court dismissed it, ruling that the States could not challenge the programme as they were unable to show that they wereharmed by it.

However, the case went to a panel in the U.S. Court of Appeals for the 8th Circuit, where all judges Republican President appointees, which put the programme on hold the next day. After this, the Supreme Court agreed to weigh in.

On June 30, SCOTUS held that the administration needs Congress’ endorsement before undertaking such a costly programme. The majority rejected arguments that the bipartisan 2003 HEROES Act gave Mr. Biden the power he claimed.

“Six States sued, arguing that the HEROES Act does not authorize the loan cancellation plan. We agree,” Chief Justice John Roberts wrote for the court.

Justice Elena Kagan dissented, joined by the court’s two other liberal judges, writing that the majority of the court “overrides the combined judgment of the Legislative and Executive Branches, with the consequence of eliminating loan forgiveness for 43 million Americans.”

What is the Biden administration’s new plan and what’s next for borrowers?

The president announced on the day of the Court ruling that the Education Secretary had initiated a new rulemaking process for the alternative plan, this time using the Secretary’s authority under the Higher Education Act, 1965, the law governing most federal student loan programmes, as mentioned above.

“I’m announcing today a new path consistent with today’s ruling to provide student debt relief to as many borrowers as possible as quickly as possible,” Biden said. “We will ground this new approach in a different law than my original plan, with the so-called Higher Education Ac,” the President said. The plan is also going to take longer as the actual process of negotiated rule making could take as far as fall this year.

While the President contends the new path is consistent with the Court’s opinion, legal scrutiny could be expected. Meanwhile, advocate and legal scholar Luke Herrine, an assistant professor of law at the University of Alabama, wrote in a 2019 paper that the “compromise and settlement” authority, a clause in the HEA, empowers the Secretary of Education with the broad authority to “compromise, waive, or release’’ federal student debt.

Instead of the current Revised Pay as You Earn (REPAYE) plan, the income-driven plan Mr. Biden’s original programme sought to alter, the administration has proposed the new Saving on a Valuable Education (SAVE) plan. “This income-driven repayment plan will cut borrowers’ monthly payments in half, allow many borrowers to make $0 monthly payments, and save all other borrowers at least $1,000 per year,” says the factsheet on the plan. 

The specifics remain the same— requiring borrowers to pay half the current share of discretionary income at 5%. Instead of forgiving loan balances after 20 years of annual payments, this plan also forgivesoutstanding principal after 10 years. Additionally, the plan seeks to raise the amount of income that is considered non-discretionary and therefore is protected from repayment. As for borrowers currently facing uncertainty, the President says they will be able to enroll for SAVE later this summer, “before any monthly payments are due.” Borrowers who sign up or are already signed up for the REPAYE plan will be automatically enrolled.

Mr. Biden also announced an alternative to the pause on student loan repayments scheduled to restart at the end of the summer: a temporary 12-month “on-ramp” for repayment, from October 1, 2023 to September 30, 2024, during which missed loan payments will not harm borrowers’ credit and the threat of default will be temporarily removed.

What are the arguments for and against broad loan cancellation?

Numerous federal student loan repayment and forgiveness programmes providing targeted relief to individuals in certain circumstances currently exist. However, proposals for broader-scale student loan debt relief—including cancellation of all or a portion of federal student loan debt—have gained considerable attention in recent years.

As the cost of education increases while wages stagnate, it has become harder for students to pay off their loans. Studies also point out how federal grants and scholarships have not kept pace with the increasing cost of education and attendance.

President Biden has explained the need for loan cancellation by arguing that higher education “should be a ticket to a middle-class life, but for too many, the cost of borrowing for college is a lifelong burden that deprives them of that opportunity.” A White House factsheet notes that middle-class American borrowers struggle with high monthly payments and “ballooning balances that make it harder for them to build wealth, like buying homes, putting away money for retirement, and starting small businesses.”

CRS Research also points to the composition of borrowers, of which “black students were more likely to borrow Title IV” HEA loans for undergraduate and graduate education “relative to any other racial or ethnic subgroup”. It also finds that certain groups of borrowers (Black, American Indian, and lower-income borrowers) have made less progress in paying down the original principal of debt when compared with other borrowers.

The government also noted how student debt burden falls disproportionately on Black borrowers. “Twenty years after first enrolling in school, the typical Black borrower who started college in the 1995-96 school year still owed 95% of their original student debt,” the White House factsheet on student debt reads.

On the other hand, critics of broad-based cancellation of loans point out how one-time loan cancellation may fail to address the underlying causes of crushing loan debt. One major cause is the skyrocketing cost of education and the need for an overhaul of the system. Another factor flagged by studies is the increasing availability and utilization of loan repayment plans that allow borrowers to make monthly payments lower than the interest accruing on their loans, meaning negative amortization ​​which may result in a larger outstanding loan balance over time.

Analysts have highlighted that policies providing across-the-board loan cancellation may result in higher-income households receiving more cancellation benefits compared to lower-income households when the total dollar amounts cancelled or the savings in annual debt service payments are looked at. Besides, large cancellation plans may also significantly impact federal budgets and debt.

(With inputs from Reuters, Associated Press)

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