This was the year the White House embraced the idea of mass student-loan forgiveness, but 2023 will likely be the year when borrowers will find out whether the policy will actually impact their wallets.
The Supreme Court is slated to consider the Biden administration’s debt-relief plan in the next several months — one of the many potential changes to the student loan system that could come in 2023.
“2023 is going to be a huge year in the student-loan world,” said Persis Yu, deputy executive director at the Student Borrower Protection Center, an advocacy group.
Here’s what borrowers should keep an eye out for next year.
Mass student-debt relief
Almost as soon as President Joe Biden announced in August that his administration planned to cancel up to $10,000 for borrowers earning $125,000 or less and up to $20,000 for borrowers who used a Pell grant in college, opponents looked for strategies to mount a legal challenge.
Several critics filed lawsuits, but courts tossed most of the legal challenges because the plaintiffs lacked standing — or the legal right to sue over a policy because you’ve been injured by it. Still, two suits made it far enough through the court system to block the debt-relief plan. In the meantime, over 26 million people filled out the Department of Education’s application to have their loans canceled.
In a federal court in North Texas, judge Mark T. Pittman called the Biden administration’s debt-relief plan unconstitutional. The case before Pittman was filed by two student-loan borrowers, who say they are injured by the mass debt-relief policy because the Department of Education didn’t seek comment on the plan, depriving them of the opportunity to weigh in, and resulting in a program that arbitrarily benefitted some and not others.
One of the plaintiffs isn’t eligible for the Biden administration’s plan, and the other doesn’t qualify for the extra $10,000 in cancellation because he didn’t receive a Pell grant. The suit is backed by the Job Creators Network, an organization founded by Bernie Marcus, the co-founder of Home Depot and a supporter of former President Donald Trump.
In striking down the debt-relief plan, Pittman, who was appointed to the bench by Trump, took the unusual step of moving quickly to decide the merits of the case instead of taking the time to determine whether the plaintiffs had standing first.
A few weeks before Pittman made his decision, a federal judge in St. Louis dismissed a suit over the policy brought by six Republican-led states, saying they didn’t have standing to sue because they weren’t directly harmed by the policy. The attorneys general representing the states have argued that because the debt relief could hurt the bottom line of state-affiliated entities earning money off the student-loan program they have standing to sue.
An appeals court temporarily blocked the Biden administration’s debt-relief policy while the panel of judges considered the case.
Now, both the Missouri and the North Texas lawsuit are slated to be considered by the Supreme Court. They’ve said they will rule on both the question of whether the plaintiffs have standing and the merits of the cases.
Predicting how the justices will rule is hard to do. Supporters of the debt-relief policy as well as Biden administration officials have said they’re confident in their legal authority. Still, in recent years the Supreme Court has viewed certain types of executive agency action — including the Environmental Protection Agency’s efforts to regulate emissions and the Biden administration’s extension of the pandemic-related eviction moratorium — skeptically.
The court is scheduled to hear oral arguments in the case in February. “Those arguments may give us a better sense of where this is going to land or they may not,” said Betsy Mayotte, the president of the Institute for Student Loan Advisors. A decision on the cases will likely come in June.
Payments are slated to resume
The Biden administration has said that student-loan borrowers will resume payments either 60 days after the litigation surrounding the debt forgiveness wraps up or 60 days after June 30, 2023, whichever comes first.
“We’re looking out to see what the administration is going to do to both fulfill this promise,” Yu said of the mass debt relief, “and with the payment pause to ensure that borrowers are not thrown into default and delinquency,” once payments resume. The government has frozen interest, payments and collections on most federal student loans since March 2020.
Part of what’s at issue in the lawsuits is whether the HEROES Act — a 2003 law that allows the Secretary of Education to provide debt relief to borrowers during a national emergency — gives the Department of Education the authority to cancel student debt en masse. The government’s lawyers have argued that one goal of the law is to ensure that borrowers won’t be left worse off financially by a disaster.
When, in the past, borrowers have resumed payments following a natural disaster or national emergency, delinquencies and defaults have climbed. To avoid a similar scenario playing out on a broader scale, the Department has said it needs to offer some relief before turning payments back on. Many of the borrowers at risk of delinquency and default could see a big chunk — if not all — of their debt wiped away through the plan announced by the president.
In addition to the mass debt relief, advocates are clamoring for changes to the student-loan program ahead of payments resuming, including an overhaul of the system used to collect debt from defaulted borrowers.
In the meantime, borrowers can also take steps to prepare for when payments resume, according to Mayotte. One of the most important is staying on top of mail and email. The Department of Education and servicers may be trying to communicate with borrowers through these channels about when their first payment is due, the status of loan forgiveness and when they might need to recertify their income to stay in their income-driven repayment plan.
In addition, Mayotte said it’s important to make sure the Department of Education and student-loan servicer has your updated contact information so they can know where to reach you.
Details on new income-driven repayment plan
When Biden first announced the debt relief plan in August, he also previewed sweeping changes his administration planned to make to the way borrowers repay their student loans.
Under a new, more generous income-driven repayment plan, Biden told reporters, borrowers with only undergraduate loans would have the opportunity to stay current on their loans by making payments that amount to just 5% of their income. In addition, the administration said borrowers with $12,000 or less in student debt only from their undergraduate studies could have the remainder of their debt forgiven after 10 years of payments.
So far the agency has provided broad outlines of the plan, but stakeholders are watching to see how some of the details will play out.
Yu said she’ll be looking to see whether borrowers with Parent PLUS loans, or the federal debt that parents can take on to pay for their childrens’ schooling will be included. Right now, borrowers with Parent PLUS loans can only access one plan that allows borrowers to pay off their debt as a percentage of their income — income-contingent repayment — and it’s the least generous of the options available.
According to Yu, there’s no legal justification for excluding parent borrowers from most of the income-driven repayment plans. Instead, she suspects they’ve been left out for two reasons. For one, the idea of allowing borrowers to repay their debt as a percentage of their income is premised on the notion that borrowing to pay for higher education should theoretically provide a borrower with an income that’s enough to service their debt and they should have some kind of insurance — in the form of monthly payments tied to their income — when it doesn’t. When parents borrow to help their children pay for college there isn’t the same expectation that the debt will improve their earning potential.
In addition, the fewer people who are eligible for the program, the less it costs. “Most of these decisions wind up being financial decisions,” Yu said. “Who can we cut out in order to conserve the cost?”
Yu said she’ll also be looking to see which provisions of the plan will apply to borrowers with graduate student loans. As part of the new repayment scheme, the Biden Administration has said the government will pay borrowers’ unpaid monthly interest while on these plans. Since payments are tied to income and not the size of the loan, many borrowers using income-driven repayment have historically made payments that don’t cover the interest causing their balance to balloon, even while they’re making payments.
In addition, the Biden administration said that the amount of income protected from repayment will rise to 225% of the poverty line. That means that a borrower earning $15 an hour could pay $0 a month and stay current on their loans under this plan.
It’s still unclear whether borrowers with graduate student loans will be able to benefit from unpaid interest and increased income protection provisions of the new repayment plan, but the Department of Education is expected to provide clarity in the coming months.
Some borrowers could see their loans forgiven or at least get closer to it
Under the income-driven repayment plans currently available, borrowers who make payments for 20 or 25 years can have their remaining balances canceled. But research as well as complaints from borrowers, advocates and law-enforcement officials indicate that borrowers are struggling to access this relief.
According to the Department of Education, that’s in part because student-loan servicers steered struggling borrowers towards forbearance — a status that pauses payments, but where interest continues to build — instead of engaging in the often time consuming process of enrolling them in income-driven repayment, where any payments, including those of $0, would count towards forgiveness.
Earlier this year, the Department announced that it would review borrowers’ payment counts and adjust them so that monthly payments that should have brought a borrower closer to the number needed for forgiveness will now count towards relief. Borrowers should expect to see these adjustments reflected this summer, including some who may have their loans forgiven as a result.
Implementation of new rules
Over the past year, the Department has issued several new rules that could change borrowers’ loan repayment experience and which are slated to take effect next year. These include changes to the Public Service Loan Forgiveness program that will allow more types of payments to qualify towards the 120 needed for debt relief (historically borrowers struggled to access PSLF often due to technicalities); cutting down on the number of situations where a borrower can see their interest capitalize — in other words when unpaid interest is added to principal; and automatically canceling the loans of borrowers who were enrolled in a school when it closed or left 180 days before it closed.
Changes for borrowers in default
Borrowers who default on their student loans can face harsh consequences, including losing out on their wages, Social Security benefits and tax refunds. The Department of Education officials have indicated (where) they plan to take a closer look at this system.
For one, as part of a program called Fresh Start, the agency removed nearly all defaulted borrowers from default and is giving them one year after the payment pause ends to take action to keep their loans out of default.
In addition, the agency said it plans to issue new rules surrounding debt collection. Though during the pandemic the government theoretically stopped collections on defaulted loans, borrowers saw their paychecks seized over the debt roughly a year and a half into the pandemic because the Department of Education struggled to get employers to stop garnishing wages.
“The system is just way out of the Department of Education’s control,” said Yu. “They can’t control the employers who are ultimately the folks taking the money from the borrowers.”
Because the agency struggled to turn off the wage-garnishment program, it shouldn’t turn it back on — and it doesn’t have to legally, — Yu said. In addition, she said, the Department of Education can use its discretion when deciding whether to use offsetting Social Security benefits to repay defaulted student loans, something she hopes officials consider doing.
“We should not be taking disability payments, retirement payments from borrowers,” she said. “This is just an abhorrent practice that needs to end and President Biden has promised to end it.”