Last week’s U.S. Supreme Court decision on President Joe Biden’s student loan forgiveness plan has left many borrowers with questions about what’s next. In Tennessee, 1 in 8 residents has student loan debt, with the average amount topping $36,000.
Now, Biden has said his administration is taking another crack at student loan forgiveness, but that will take some time.
The Supreme Court blocked the administration’s original pathway. It had used the pandemic-era HEROES Act. That law gives the secretary of education the authority to “waive or modify” student loans during an emergency. But the court ruled that the Biden administration’s plan overstepped. Now the administration is pursuing a new route to student loan forgiveness under the Higher Education Act of 1965.
This pathway requires a lengthy rule-making process that includes public hearings and comments. The Education Department has taken the first step by announcing its intention to form a special rule-making committee. Several Democrats had urged the president to use the Higher Education Act for student debt forgiveness back in 2021.
What does this mean for student loan borrowers?
Interest will start accruing on student loans again in September, and payments restart in October. But the administration is trying to soften the financial blow.
For the first year after payments resume, folks who miss a payment won’t see a ding on their credit report, go into default or be sent to collections. The Biden administration is referring to this period as an “on-ramp” to shield borrowers from the “harshest consequences of missed, partial, or late payments.” It’s automatic, and there’s no need to enroll. Still, borrowers who are able to make payments in-full and on-time should do so.
Meanwhile, the administration is also encouraging borrowers to enroll in income-driven repayment plans. Those can make monthly payments more manageable by basing them off discretionary income and family size.
This summer the administration will roll out its SAVE Repayment Plan. The Education Department calls it the “most affordable repayment plan in history.” It will take effect before repayments resume in the fall. Under this plan, an individual who makes $30,000 a year would owe nothing on their monthly loan payments. Borrowers who earn more will save at least $1,000 per year compared to other income-driven plans, according to the Federal Student Aid office.
The plan also prevents loan balances from growing due to interest if borrowers make their payments on time. The Federal Student Aid website gives the following example:
“If $50 in interest accumulates each month and you have a $30 payment, the remaining $20 would not be charged.”
Student borrowers enrolled in the Revised Pay As You Earn (REPAYE) Plan will automatically be put on the SAVE Plan when it becomes available. Additional changes to the SAVE Plan are expected to take effect in the summer of 2024. They’ll likely reduce people’s monthly payments even more.
Borrowers can find more information at studentaid.gov.
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