Student Loan Forgiveness Blocked, Payments Restarting

The student loan forgiveness plan introduced by the Biden administration in August 2022 has been rejected by the Supreme Court. More than 26 million borrowers had already applied or been approved for forgiveness, and it was estimated that the plan would provide relief to about 40 million people.

President Joe Biden had announced up to $20,000 of forgiveness for federal student loan borrowers. But from the very beginning, several lawsuits emerged to challenge the plan. As student loan interest and payments are expected to resume on September 1, 2023, the court’s ruling is a major setback to federal student loan borrowers.

What was the Supreme Court’s opinion?

To enact the forgiveness plan, the Biden administration contended that Education Secretary Miguel Cardona had the authority to waive or modify student loan regulations during national emergencies such as the COVID-19 pandemic. The Supreme Court disagreed, arguing that such a large amount of debt cannot be canceled without congressional approval.

“The Secretary asserts that the HEROES Act grants him the authority to cancel $430 billion of student loan principal. It does not,” Chief Justice John Roberts wrote. “We hold today that the Act allows the Secretary to ‘waive or modify’ existing statutory or regulatory provisions applicable to financial assistance programs under the Education Act, not to rewrite that statute from the ground up.”

The court’s decision ends a long legal saga in the Biden administration’s quest for loan forgiveness. The plan was originally blocked last fall, when several states argued that it would hurt student loan companies.

With the most recent decision from the Supreme Court, student loan forgiveness is not expected. The only way to reverse a decision by the Supreme Court is with congressional action or a new ruling by the court. Given the House of Representatives has a conservative majority, it’s highly unlikely any loan forgiveness legislation would make it to President Biden’s desk.

However, President Biden has indicated that his administration will pursue other legal avenues to pass student loan forgiveness.

How does this affect the payment pause?

Payments and interest on federal student loans have been paused since March 2020, and that pause is set to expire on September 1, 2023. As part of the recent debt ceiling negotiations, that date was enshrined into law and is unlikely to be extended again. Borrowers’ first loan payments will be due beginning in October.

Since 2020, the pause has been extended several times by both former President Donald Trump and Biden. Federal officials indicated the most recent pause would be the final one, but given the recent legal challenges, the Biden administration extended it once more.

How to manage your loans when payments restart

With payments restarting after more than three years, review your student loans and see where they stand. Here are some important steps to take before payments resume.

Confirm your loan servicer

You should confirm that your loan hasn’t changed hands during the pause. Several loan servicers have left the federal lending program since 2020, and your debt may have been transferred to another company. You should have received notices if this happened, but you can confirm your federal loan servicer by logging into StudentAid.gov.

Once you know who’s managing your debt, make sure your loan servicer has your current contact information so you don’t miss any important communications.

Re-enroll in autopay

You should receive a billing statement at least three weeks before your first payment is due. If you were previously making automatic student loan payments before the pandemic, you must opt back in. Confirm your payment settings with your loan servicer to make sure you don’t get hit with a late fee.

Re-evaluate your loans

Remind yourself of where your loans stand and take note of your interest rates, loan balances, and remaining years in repayment. If you think your loans will be unaffordable after payments resume, consider the following strategies:

•  
  • Change your repayment plan: Selecting a new repayment plan can lower your loan payments. Income-driven repayment (IDR) plans, for example, set your monthly payment amount at a percentage of your discretionary income. This can make your loans more affordable, and after 20 or 25 years of repayment, any remaining balance can be forgiven.
  • Request deferment or forbearance: By demonstrating economic hardship or meeting other qualifications, you could request deferment of your payments or forbearance from your loan servicer. Both options pause your payments for an allocated number of months. However, interest typically continues to accrue, so this strategy is best used as a short-term solution.
  • Look into other forgiveness opportunities: While Biden’s forgiveness plan was the broadest loan cancellation opportunity to date, there are other loan forgiveness programs you may qualify for. Government or nonprofit employees may qualify for Public Service Loan Forgiveness, and professionals like teachers, doctors, nurses, lawyers, and dentists can often access specialized forgiveness plans based on their employment.
  • Consider refinancing: If your payments are too substantial, refinancing student loans can be a great alternative to lower your interest rate. And by choosing a shorter repayment term, you could potentially pay off your student loans faster. Note that refinancing means you’ll lose access to federal benefits and protections, so it may not be wise if you’re enrolled in an income-driven repayment plan or pursuing a federal forgiveness program.

Does this affect the new income-driven repayment plan?

The block does not affect the new income-driven repayment plan. Along with the student loan forgiveness announcement in August, the Biden administration also announced an overhaul of its income-driven repayment plans. The new changes would benefit 30% of student loan borrowers who are currently enrolled in an IDR plan.

Here’s what the new plan entails:

• Monthly payments are capped for borrowers at 5% of their discretionary income, instead of the current 10%. The White House estimates that this will lower the average annual student loan payment by more than $1,000 for current and future student loan borrowers.
• Balances of less than $12,000 are forgiven after 10 years instead of 20 years.
• Non-discretionary income amount will be raised, ensuring that no borrower earning under 225% of the federal poverty level will make a monthly payment.