Biden Plan Cuts Student Loan Payments for Millions of Borrowers to $0 — Will it Be the Next Legal Battle?

The Biden administration says his new plan is a “student loan safety net.” Opponents call it a backdoor attempt to make college free. However, it could be the next battleground in the legal fight over student loan relief. 

Beginning this summer, millions of Americans with student loans will be able to enroll in a new repayment plan that offers some of the most forgiving terms ever allowed. Interest won’t accrue as long as borrowers make regular payments. Millions of people will also have monthly payments reduced to $0. In as few as ten years, any remaining debt will be canceled. 

Known as the SAVE Plan, although it was announced the last year, it has been overshadowed by President Joe Biden’s proposal for mass student loan cancellation. After the Supreme Court struck down Biden’s forgiveness plan, the repayment option is taking center stage. 

Since the ruling, Biden has shifted attention to the lesser-known initiative and proposed an alternate approach, calling it “the most affordable repayment ever.” The typical borrower who enrolls in the plan is predicted to save $1,000 a month.

Republicans have fought against the plan and said it oversteps the president’s authority. Senator Bill Cassidy, the ranking GOP member on the Health, Education, Labor, and Pensions Committee, called it “deeply unfair” to the 87% of Americans who don’t have student loans. 

Previously, the Congressional Budget Office estimated that the plan would cost $230 billion over the next decade, which would be even higher now that the forgiveness plan has been struck down. Estimates from University of Pennsylvania researchers put the cost at as much as $361 billion. 

Emboldened by the decision by the Supreme Court’s decision on cancellation, some opponents say it’s a matter of time before the repayment plan also faces a legal challenge. 

How is Biden’s repayment plan different?

As part of President Biden’s debt repayment plan announced last year, he said his Education Department would create a new income-driven repayment plan that lowers payments even further. The plan became known as the SAVE Plan, intended to replace income-driven plans. 

Borrowers can apply for the program later this summer; however, some changes will be phased in over time.

People will immediately be eligible for $0 payments. The new plan won’t require borrowers to make payments if they earn less than 225% of the federal poverty line — or $32,800 per year for a single person. In contrast, the cutoff for current plans is 150% of the poverty line, or $22,000 a year for a single person. Another immediate change aims to prevent the snowballing of interest.

As long as borrowers make monthly payments, their overall balance won’t increase. The remaining interest will be waived once they cover their adjusted monthly payment, even if it is only $0. 

Other significant changes will take effect in July 2024. Notably, payments on undergraduate loans will be capped at 5% of discretionary income, down from the 10% it is now. Individuals with undergraduate and graduate loans will pay between 5% and 10%, depending on the original balance of their loan. For millions of Americans, monthly payments could be reduced in half.

Next July, a faster road to loan forgiveness opens up. Beginning then, borrowers with original balances of $12,000 or less will get the remainder of their loans canceled after ten years of payments. For every $1,000 borrowed past, the cancellation will come after another year of payments. 

The Department of Education says it will notify borrowers when the new process for application launches this summer. Those enrolled in an existing plan, known as REPAYE, will be automatically moved into the SAVE plan. Borrowers can also sign up by contacting the servicers of their loans directly. 

Pros and cons of the Biden plan

Supporters of President Biden’s plan will offer relief and simplify repayment to millions of borrowers. The Biden administration argues that ballooning student debt puts college out of reach for many Americans and holds borrowers back financially. 

Opponents say it is an unfair perk for those who don’t need it and say it passes a heavy price on to taxpayers who didn’t go to college or already repaid student loans. Some worry it will incentivize colleges to raise tuition prices since they know many students will get their loans canceled later. 

Instead of creating a new repayment plan from scratch, the Biden administration proposed changing an existing one. It cemented the changes by going through a negotiated rulemaking process that allows federal regulations to be developed by the Education Department without Congress.

Critics question if the new plan goes further than the law allows. Over 60 Republican legislators urged Education Secretary Miguel Cardona to withdraw the plan in February and called it “reckless, fiscally irresponsible, and blatantly illegal.”

Supporters argue that the Obama administration used its authority similarly to create a repayment plan that was more generous than any others at the time.

The Biden administration finalized the rule formally this month. Conservatives believe it’s vulnerable to a legal challenge, but some say it’s just a matter of finding a plaintiff with the legal standing, or correct, to sue.