Millions of student loan holders face debt forgiveness uncertainty in 2023

The court said last week that it would hear arguments on Feb. 28 intwo cases challenging the Biden administration’s plan to cancel up to $20,000 in debt for qualifying borrowers. A ruling is expected by the end of June.

After lower courts blocked mass debt cancellation, the administration delayed the end of the pandemic freeze on loan repayment for the sixth time under Mr. Biden. Payments and interest accrual, which have been frozen since March 2020, are now scheduled to resume 60 days after litigation over the loan-forgiveness program is resolved or the program is implemented.

The result is that borrowers, debt servicers and federal policy makers are entering 2023 facing uncertainty about exactly when student loan payments will restart, how much—if any—debt relief will be granted and what sorts of payment plans will be offered to borrowers. More than 40 million people collectively hold $1.6 trillion in federal student debt.

A Supreme Court decision that blocks the plan would disappoint debtors who were counting on the relief and would make the process of restarting monthly payments after a yearslong pause more difficult.

“If cancellation doesn’t end up happening, borrowers will have a difficult time trusting what the Education Department and government tells them about student loans and the programs that are available to assist them,” said Josh Rovenger, an attorney for the Legal Aid Society of Cleveland who works with low-income and middle-income borrowers.

Loan servicing companies have complained about the Biden administration’s frequent extensions of the pause, sometimes on short notice. Some Education Department officials concede they are worried about payments restarting smoothly.

“We’ve had to react to decisions made by the administration in real time,” said Scott Buchanan, head of the Student Loan Servicing Alliance, an industry group. “It’s been hard to guide borrowers about what to expect without a road map of how it’s going to look at the end of the day.”

By law, servicers must attempt to contact borrowers several times before payments are due. They must also hire and train new staff to answer an anticipated deluge of calls from borrowers who are unfamiliar or out of practice with loan payments.

The administration’s debt forgiveness plan has already been blocked by multiple federal courts. In November, a Texas judge ruled that the administration had improperly used powers only available to Congress in creating the program. In a separate case, another court ruled that the state of Missouri had a proper basis for challenging the program, but didn’t make a ruling on the merits of the case.

GOP officials in six states sued the administration, as have an array of borrowers backed by conservative legal organizations. The states’ suit says the president’s program unconstitutionally usurps congressional authority to make law and will adversely affect state tax revenues. Another lawsuit takes aim at the eligibility requirements for cancellation, arguing that they improperly excluded some borrowers.

Education Secretary Miguel Cardona has said the administration feels “confident in our legal authority” to cancel the debt. When Mr. Biden announced the plan in August, he described it as a necessary one-time move to lessen the “unsustainable debt” saddling borrowers.

Several marquee initiatives of the Biden administration have met their demise at the Supreme Court, including a pandemic-related eviction moratorium and vaccinate-or-test mandate for large employers.

When he announced the plan, Mr. Biden paired one-time mass debt cancellation with an overhaul of existing loan payment programs that also has yet to be enacted. That will require changing Education Department regulations and would likely be more insulated from legal challenges because Congress created the payment programs initially.

To prevent student debt balances from ballooning in the future, the administration plans to cut from 10% to 5% the amount of discretionary income borrowers must pay each month on their undergraduate loans if they are enrolled in an income-driven repayment plan. Borrowers making less than 225% of the federal poverty line wouldn’t have to make monthly payments on their loans.

No borrower’s loan balance will grow as long as he or she makes the monthly payments, even if a low-income borrower’s monthly requirement is set at $0. The change would also forgive loan balances for people enrolled in income-based plans after 10 years of payments, down from 20 under many of the current options, for borrowers whose original loan balances were $12,000 or less.

The goal will be to automate much of the process—in part by working with the Internal Revenue Service to verify borrower incomes each year—and reduce the onerous paperwork requirements that hurt enrollment in the past, a senior Education Department official said.

More than 7 million borrowers have loans that haven’t been assigned to a payment plan at all. Most of those borrowers either graduated or otherwise separated from a school since March 2020, according to Education Department data. Millions more are having their payment status returned to “good standing,” meaning they will no longer be in default on their loans and can return to repayment, as part of a separate effort by the Biden administration to improve the student-loan system.

“The scale of what the Biden administration has taken on in just two years is certainly on par, if not greater than, what the Obama administration took on over eight years,” said Clare McCann, a higher education fellow at Arnold Ventures who left the Education Department in August. But “the amount of work it requires to execute on all of that cannot be underestimated.”

Jonnie De Kam, an engineer in Sioux Falls, S.D., said he has used the money he would have devoted to loan payments to learn copywriting, a skill he hopes will allow him to earn extra money on the side.

“With inflation and prices of everything rising, it’s nice to have that relief. I’m trying to turn it into an investment,” Mr. De Kam said.

Since he graduated in 2019, he has only had to make a few student loan payments on his roughly $30,000 in debt. If mass cancellation survives the legal challenges, he would be eligible for $20,000 in relief, since he was a Pell Grant recipient.

He said he hasn’t allowed himself to become dependent on the mass debt cancellation plan because he’s skeptical it will survive. “Student loan forgiveness was probably a vote grab,” he said.

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