Student Loan Forgiveness: Will Biden’s Fallback Plans Cost Taxpayers Billions More Than Projected?

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The Supreme Court might have killed President Joe Biden’s federal student loan forgiveness plan last month, but the president hasn’t given up on pushing some kind of debt relief forward. Almost as soon as the SCOTUS announced its decision, Biden said he would move forward with a new loan forgiveness strategy.

One of the concerns now is how much that strategy will end up costing taxpayers. According to one estimate, it could cost up more than $270 billion — much higher than originally projected by the administration.

Following the SCOTUS decision on June 30, the White House issued a memo detailing a pair of initiatives that aim to provide debt relief for as many borrowers as possible, as fast as possible.”

One of the initiatives, called Saving on a Valuable Education (SAVE), is an income-driven repayment (IDR) plan that aims to cut monthly payments in half. Some borrowers will qualify for $0 monthly payments under the plan, while all other borrowers will save at least $1,000 a year. The plan will also ensure that borrowers don’t see their balances grow from unpaid interest.

By law, the regulations will go fully into effect on July 1, 2024, according to the White House. But some of the benefits will be implemented this summer, before the student loan payment pause ends.

Here are highlights of the SAVE plan:

  • For undergraduate loans, the plan will cut in half the amount that borrowers have to pay each month from 10% to 5% of discretionary income.
  • Increase the amount of income considered non-discretionary and therefore protected from repayment. This will guarantee that no borrower earning less than 225% of the federal poverty level — up from 150% previously — will have to make a monthly payment. Those who earn the income threshold (about $15 an hour for a full-time worker) or less could qualify for a $0 monthly payment on the SAVE plan, CNBC reported. 
  • Forgive loan balances after 10 years of payments instead of 20 years for borrowers with original loan balances of $12,000 or less. The U.S. Department of Education estimates that this reform will help nearly all community college borrowers be debt-free within a decade.
  • Eliminate charges to borrowers with unpaid monthly interest. Unlike other IDR plans, this means no borrower’s loan balance will grow as long as they make their monthly payments — even when that monthly payment is $0 because their income is low.
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All student borrowers in repayment will be eligible to enroll in the SAVE plan, the White House said. Borrowers will be able to enroll later this summer before any monthly payments are due, though no specific date had been set at the time of the announcement.

An analysis of the plan by Reason Magazine noted that many federal student loan borrowers will be asked to make monthly payments that are 50% less than currently required. Meanwhile, a “substantial number” will need to make the smaller payments for half as long as they previously did before their debts are eliminated entirely — something that could result in “more outstanding debts that are never paid off by borrowers, leaving taxpayers with the tab.”

Reason cited a Congressional Budget Office (CBO) study estimating that the 10-year cost of the revised IDR rule would be $230 billion. Another $45 billion was expected to be added to the cost following the Supreme Court decision, bringing the total cost to $275 billion. That’s well above last year’s U.S. Department of Education projections that Biden’s IDR plan would cost only $138 billion.

“The administration’s estimate did not take into account the likelihood that asking fewer people to pay off their loans would result in more student borrowing,” Reason Magazine noted in its analysis. “Those ‘behavioral effects’… will drive the cost higher.”

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