Following the Supreme Court’s 6-3 decision to strike down President Biden’s student loan relief program, the administration has announced a Plan B entailing several new steps.
Some will take place right away — such as the 12-month “on-ramp” to repayment, running from Oct. 1, 2023, to Sept. 30, 2024, “so that financially vulnerable borrowers who miss monthly payments during this period are not considered delinquent, reported to credit bureaus, placed in default, or referred to debt collection agencies.” Meanwhile, other changes will take longer to be effective and could face several legal challenges.
“The Biden administration is trying another path to get some student loan forgiveness. It could be a long process and is likely to get wrapped up in politics as we approach the next presidential election,” said Jay Zigmont, PhD, CFP and founder of Childfree Wealth. “Bottom line is to not hold your breath for it, but if it happens, great.”
Experts are already pointing to the issues the new plan might face.
The New SAVE Plan (Replacing REPAYE) Will Go Into Effect
One of the steps the administration announcement is a repayment plan — called the Saving on a Valuable Education (SAVE) Plan — which will cut monthly payments to $0 for millions of borrowers making $32,800 or less ($67,500 for a family of four) and save all other borrowers at least $1,000 per year, according to the Education Department. The SAVE plan will replace the existing Revised Pay-As-You-Earn (REPAYE) plan. Additional benefits will go into effect in July 2024.
The Department of Education said that if you sign up for the REPAYE plan now, you will automatically be enrolled in the SAVE Plan before payments resume.
“For all borrowers that currently are taking loans or are looking at getting into an income-driven plan, there has never been a program like SAVE and with the one time account adjustment waiver in place through the end of 2023; it is in the best interest of all borrowers to get into REPAYE now so it will convert to SAVE and maximize all the benefits and subsidies offered by the Department of Education with these programs,” said Zack Geist, founder of Student Loan Tutor.
This sentiment is echoed by many experts, including Zigmont, who added that this program is a good option for many, even though the full application for it is not out yet.
Zigmont noted that the SAVE program will usually lower your payments, and the big bonus is that interest will stop accruing.
“The big reduction that will cut payments in half for undergraduate borrowers (from 10% to 5% of discretionary income) will not hit until 2024. The bottom line is to apply now for the REPAYE program,” he said.
College Tuition Could Become Pricier
According to non-profit organization Arnold Ventures, the income-based repayment plan could have effects “for higher-income students who might otherwise cover some of the costs out-of-pocket.” In turn, colleges might be encouraged to raise their tuition costs.
“For institutions, the temptation to encourage borrowing to further pad tuition revenue may be too strong for many to resist,” the group suggested.
However, Will Sealy, co-founder and CEO of Summer, said that while tackling the rising costs of college tuition is an important requirement for fixing our “broken system,” this should not prevent policymakers from acting to address the problems for those who already hold student debt.
“We often hear from borrowers who struggle to make loan payments that it can feel like their house is on fire. We can simultaneously put out the flames for them while calling for a better smoke alarm to prevent these problems for the next generation,” said Sealy.
In turn, Sealy said that for future college students, he advises families to carefully review financial aid packages and explore alternatives such as scholarships, grants, and work-study programs to relieve the burden of high tuition.
“Before taking on student debt, know that not all loans are equal, and it’s important to understand the terms of any loan you’re considering,” added Sealy.
It Could Disincentivize Students in Terms of Making Payments
The Washington Examiner argued that the new “on ramp” part of the new plan could incite some borrowers to not pay their loans during the next year, as they don’t “see an incentive to restart payments that they haven’t had to make since the pandemic.”
On the contrary, some experts, such as Geist, argue that borrowers are still going to have to pay — or face penalties of late payments and interest capitalization after the “on-ramp period” of 12 months. This would be ongoing while the next phase of the proposed forgiveness is underway.
“There is no incentive not to pay long term, but rather an incentive to borrow more money because the repayment could be 37% of the total balance if the borrower maintained a $0 payment for 20-25 years,” added Geist.
The Cost of Plan B Might Be Higher Than the Cost of the Original Plan
“Even though fewer people may feel debt relief under the new plan, the cost of student loan forgiveness efforts could still rise,” the Washington Examiner reported.
The cost of the original (struck down) plan was estimated at $400 billion by the Congressional Budget Office.
The University of Pennsylvania Wharton School’s estimate of how much the income limits on repayments will cost is as high as $360 billion over the next decade, with more costs to come if the program continues indefinitely, according to the Washington Examiner.
Yet, as Sealy pointed out, nearly one in five borrowers — approximately 8 million people — defaulted on a student loan before the pandemic by failing to make payments for nine months in a row. And at an average monthly payment of $350 payment per borrower, he added, that comes to roughly $33 billion per year, or $330 billion dollars over a decade. This figure arrives without taking into consideration any impacts on the economy beyond the unpaid debt itself.
“While critics of income-driven repayment plans talk about the high cost of these programs, they fail to acknowledge that the alternative is taking away an important lifeline for millions of people who will inevitably default on their loans, leaving taxpayers to pick up the tab,” said Sealy. He added that these plans offer up a more gradual approach to solving the student debt crisis and serve as a better model to support the next generation of college graduates.
“If the alternative for borrowers is paying the full amount under a 10-Year Standard Plan or simply defaulting on their loan by refusing to pay, IDR plans present borrowers with a reasonable compromise. These provide a middle ground for borrowers and taxpayers that seem to be on opposing sides of the cancellation debate.”
The New Plan Isn’t Looking at the Big Picture and Only Helps a Subset of Borrowers
Finally, other experts disagree. “President Biden is throwing the kitchen sink at the Supreme Court. He desperately wants student loan forgiveness, so he’s latching onto any legal argument he can,” said Howard Dvorkin, CPA and chairman of Debt.com.
Dvorkin further argued that, by rushing to find a solution, the administration is missing a cohesive strategy. “Plan B” may only help a subset of borrowers today.
“What about graduates who are burdened next year? In five years? In a decade?” he said, adding that college is too expensive.
“[College] no longer returns its investment. Tuition has been rising faster than the cost of living for decades. If you throw together a student loan forgiveness plan now, you’ll be on that treadmill forever.”
Dvorkin added that he feels “terrible for the borrowers who have been living in a state of anxiety for years now.”
“Many borrowers have asked me what they should do,” he added. “Instead of worrying about what will happen with forgiveness, focus on your finances right now. If it’s at all possible, sock away some money in an emergency fund. If, against all odds, forgiveness happens, then you have a tidy little nest egg. If it doesn’t, you have a small pot of money to make your first couple payments when September rolls around.”
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