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It’s Time To Move On From Student Loan Forgiveness

Throughout this Supreme Court term, the student loan cases were probably the most closely watched and talked about.

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Past Due Student Loan PaperworkWhen President Joe Biden announced his student loan forgiveness proposal back in November, it was immediately challenged in court by individuals and six attorneys general of Republican-controlled states. Most observers predicted that it would be struck down by the Supreme Court’s six Republican-appointed justices.

Standing, or whether the plaintiff has suffered an injury that can be redressed by the courts, was an issue in this case. The Court issued two decisions where they denied standing to the plaintiffs because they did not suffer a harm that could be traced to the defendant. Many observers thought this was a hint as to how the Court would decide as the reasoning could be applied to this case. So it gave some borrowers hope that loan forgiveness would be allowed.

Throughout this Court’s term, the student loan cases were probably the most closely watched and talked about. So it was possible that the Court could issue a compromise opinion. My prediction was that the Court would rule that the states and the individuals had no standing. However, the majority opinion would explain how the future plaintiffs can easily obtain standing in a future lawsuit. A majority concurring opinion would state that if the case is brought back to the Court, it will be struck down on the merits using the major questions doctrine (MQD) as the student loan issue had great political and economic significance and thus requires congressional approval. This outcome would ensure that a future president would not do this again without congressional approval. Also, it would improve the Court’s public image, which could temper those who call for packing the Court.

Last Friday, the Court, in the final day of the term, issued the first of its two student loan decisions. In the first case, the Court unanimously ruled that the two individual plaintiffs lacked standing to sue. At that point almost everyone thought that that was the final decision and that student loan forgiveness was upheld.

But a minute later, the Court announced its second decision, where it ruled that the six plaintiff states had standing to sue and that Biden’s loan forgiveness proposal required congressional approval under the MQD.

Soon after the decisions were released, Biden issued a statement condemning the decision, stating that he would pursue loan forgiveness options using the Higher Education Act (HEA). However, he and the secretary of education cautioned that this must go through the regulatory approval process first, which can take some time. He also announced a new program called Saving on a Valuable Education (SAVE). Some of the key features of SAVE are:

  • Income minimums have been increased before borrowers are required to make payments on their loans.
  • Payments on undergraduate loans will be reduced from 10% to 5% of discretionary income.
  • Starting in July 2024, borrowers with original principal balances of $12,000 or less will receive forgiveness of any remaining balance after making 10 years of payments, with the maximum repayment period before forgiveness rising by one year for every additional $1,000 borrowed. For example, if your original principal balance is $14,000, you will see forgiveness after 12 years. Payments made previously (before 2024) and those made going forward will both count toward these maximum forgiveness time frames.
  • Various interest deferral provisions and credits toward forgiveness for certain periods of deferment and forbearance.

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Lastly, Biden stated that those who cannot pay their outstanding loans have 12 months before their account is sent to collections and a negative report is sent to a credit agency. It was called an on-ramp program to help borrowers transition to repayment. However, interest will continue to accrue.

In general, Biden’s backup plan makes things more complicated.

First is the on-ramp transition program which suspiciously sounds like another payment moratorium. Due to Biden’s numerous payment extensions despite each one being the “final” extension, Congress passed a law which prohibited future extensions. But according to Biden, the on-ramp program is not a “pause.” Assuming there is no outside intervention, it is very possible that when the transition period ends in July 2024, there will be another extension that lasts until November 2024.

Second, both the on-ramp program and the proposed reduced payment amounts for those on IDR can create problems in the long run when it comes to interest accrual. While there is supposedly a cap on interest accrual, few are clear as to how it will work. This can result in some people seeing bigger balances in the future. And those who have more financial options and resources might opt to exploit the interest deferral and not pay their loans if it is more profitable to do so, especially with high-yield savings accounts currently approaching up to 5% APR pre-tax.

Also, there is the matter of future loan forgiveness under the HEA. No one knows when Loan Forgiveness 2.0 will be announced, but few would be surprised if it comes during the election campaigns next year. If Biden proposes another massive forgiveness program, the Supreme Court will again strike it down using MQD. Missouri will again sue because it will have standing through MOHELA even though its employees seem to have no interest in litigating this matter. Whether this will trigger an exodus of MOHELA’s current customers to another federal student loan servicer is uncertain.

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For about one minute, we had student loan forgiveness. But then the Supreme Court pulled a sike, and borrowers were left with a backup plan that leaves unanswered questions and may require the vulnerable to make financially complicated decisions. In the long run, borrowers should have a financial plan to pay off their loans or prepare for forgiveness at the end of their income-based repayment term.

Steven Chung is a tax attorney in Los Angeles, California. He helps people with basic tax planning and resolve tax disputes. He is also sympathetic to people with large student loans. He can be reached via email at stevenchungatl@gmail.com. Or you can connect with him on Twitter (@stevenchung) and connect with him on LinkedIn.

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