When President Biden announced his plan to forgive up to $20,000 in federal student loans for some borrowers last August, he framed it as part of a multi-pronged

–

Long-term approach to ease the burden on loan holders and avoid a wave of defaults.

Now, in the closing months of the federal student loan amortization, it’s clear that much of that safety net won’t materialize.

The Supreme Court on Friday blocked Biden’s debt forgiveness plan, and his administration is still finalizing a review of a program that allows borrowers to pay only a small portion of their discretionary income for student loans. Several outside companies contracted by the Department of Education to collect debts have laid off staff, reduced call center hours or stopped handling student loans.

The Biden Administration

is

now

confronted with

an unprecedented task: helping tens of millions of borrowers make payments in a student loan system that has been dormant for three years.

Nothing like this has ever been attempted in the history of consumer finance, says Cody Hounanian, executive director of the Student Debt Crisis Center, which advocates for debt forgiveness. It’s a huge, monumental task that will face roadblocks and obstacles along the way.

Congressional Democrats and debt forgiveness advocates are urging Biden to continue pushing for loan forgiveness before payments resume later this year. Biden said he would announce the next steps his administration will take on Friday afternoon. “I believe the court’s decision to halt our student debt relief plan is wrong,” Biden said in a statement. “But I will do everything I can to find other ways to help hard-working middle-class families.” NOT SURE WE NEED THIS DETAIL The Department of Education argued that it had the right to introduce up to $20,000 in debt forgiveness under the HEROES Act, a 2003 law passed to help ease the burden of student debt for people affected by a national emergency. The court argued that the law did not allow the government to forgive $430 billion in federal student loans. But borrower advocates say the president may have other powers at his disposal.

Federal student loan payments have been paused and interest has not accrued under a deferral program that has been extended several times under former President Trump and President Biden. After several false starts, the Biden administration has been legally blocked from extending the payment suspension due to provisions in the deal he signed earlier this month to raise the debt ceiling. Student loan interest begins on September 1, and loan repayments begin in October.

Borrower advocates and government officials are bracing for a rocky return to repayment.

When Biden announced his student loan forgiveness plan last year, he said we were on an economically sound course by resuming student loan payments while providing targeted relief.

Under the blocked plan, the Department of Education would have forgiven up to $10,000 in federal student loans for those earning less than $125,000 a year, or $250,000 for married couples. People who received Pell Grants for low-income students would have qualified for an additional $10,000. That’s what the board thought

almost

20 million people would have

should have qualified

their debt eliminated by the proposal.

In addition to cancellations, Biden touted changes in administration were programs designed to help lower borrowers’ monthly payments or get their loans forgiven.

The largest proposal is the Department of Education’s review of one of its means-tested repayment programs. Under new proposed regulations released in January, the threshold for what counts as discretionary is

income

would be resurrected

income above

150% of the federal poverty level to 225%. Borrowers with undergraduate debt would only owe 5% of their discretionary income each month, instead of 10%.

Individuals earning less than $30,600 a year (or $62,400 in a family of four) would owe nothing in student loans each month. Borrowers whose monthly payments do not cover accrued interest would be forgiven. The Congressional Budget Office estimated the plan would cost $230 billion over the next 10 years.

The plan will be finalized sometime this year, Secretary of Education James Kvaal told a House panel in May.

Opponents of the plan say it could entice students to borrow more and encourage colleges to charge more tuition.

Biden’s student loan policy is not aimed at

widely distributed

cancellation, but on improving the complex web of safety net programs available to help borrowers, often by reversing policies implemented by Trump’s education department.

need a word to differentiate between general cancellation and targeted programs so trying widespread

The Biden administration has approved tens of billions in loan forgiveness for people who say they have been defrauded by their colleges and has made it easier for people with permanent disabilities to pay off their loans.

The Department of Education has also made things easier for people who may or may not be in government employment

–

profit work, such as teachers, nurses and social workers, to get their loans

canceled cancelled

through the Public Service Loan Forgiveness program. More than 615,000 civil servants were approved through the program for $42 billion in forgiveness, the department announced in May.

But most of the roughly $1.7 trillion federal student debt held by 43 million Americans isn’t going to be forgiven any time soon.

Without loan forgiveness or a new income-driven repayment plan, many borrowers will revert to a borrowing system nearly identical to the one that existed before the COVID-19 pandemic.

I view the payment pause as a tourniquet, said Persis Yu, deputy executive director and managing counsel at the Student Borrower Protection Center. The problem is that you can’t just let go of a tourniquet; you must actually perform the repair. And we didn’t.

A lot has changed for borrowers in three years. Some have moved and have not updated their contact information with their loan manager. Some have new loan managers. Some were in arrears on their loans before the amortization break, while others have higher or lower incomes that affect their monthly balance. Millions of borrowers who have graduated since 2020 will pay their first student loans later this year.

At the heart of the predicament of the student loan system is the disparity between the magnitude of the challenge and the resources available. The Federal Student Aid Office received $800 million less than it requested from the administration leading up to this year, as Republicans in Congress blocked funding that could be used to pass loan forgiveness. That has reduced funds for contracts with lending companies, which have been scaled back just as demand is about to explode.

Federal loan managers such as Navient and Great Lakes have exited the student loan market and transferred their portfolios to other companies. According to a June 2023 report from the Consumer Finance Protection Bureau, about 44% of student loan holders will have to work with a new administrator when payments resume.

The loan repayment system was not designed to allow millions of people to pay back at once, said Scott Buchanan, the executive director of the Student Loan Servicing Alliance, a trade association for student loan servicing organizations. He encouraged borrowers to contact administrators now.

If we can flatten the demand curve of the student loan amortization environment by having people reach out in June, July and August, we can relieve some of the pressure on the system, Buchanan said.