2023-07-12 07:11:47
WASHINGTON — The Biden administration calls it a “student loan safety net.” Opponents call it a backdoor attempt to make college free. And it could be the next battleground in the legal fight for student loan relief.
Starting this summer, millions of Americans with student loans will be able to sign up for a new repayment plan that offers some of the most lenient terms ever. Interest will not accrue as long as borrowers make regular payments. Millions of people will have monthly payments reduced to $0. And in as little as 10 years, any remaining debt will be paid off.
It’s known as the SAVE Plan, and although it was announced last year, it’s been largely overshadowed by President Joe Biden’s proposal for a massive student loan cancellation. But now, after the Supreme Court struck down Biden’s pardon plan, the payment option is taking center stage.
Since the ruling, Biden has proposed an alternative approach to paying off debt and has also focused attention on the lesser-known initiative, calling it “the most affordable payment plan in history.” The typical borrower who signs up for the plan will save $1,000 a month, he said.
Republicans have fought the plan, saying it oversteps the president’s authority. Sen. Bill Cassidy, the ranking Republican on the Health, Education, Labor and Pensions Committee, called it “deeply unfair” to the 87% of Americans who don’t have student loans.
The Congressional Budget Office previously estimated that over the next decade the plan would cost $230 billion, which would be even higher now that the forgiveness plan has been struck down. Estimates by researchers at the University of Pennsylvania put the cost at up to $361 billion.
Emboldened by the Supreme Court’s cancellation decision, some opponents say it’s a matter of time before the payment plan also faces a legal challenge.
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Here’s what you need to know about the SAVE Plan:
WHAT IS AN INCOME DRIVEN PAYMENT PLAN?
The US Department of Education offers several plans to repay federal student loans. Under the standard plan, borrowers are charged a fixed monthly amount that guarantees that all their debts will be paid off after 10 years. But if borrowers have a hard time paying that amount, they can sign up for one of four plans that offer lower monthly payments based on income and family size. These are known as income-based payment plans.
Income-based options have been offered for years and typically cap monthly payments at 10% of the borrower’s discretionary income. If a borrower’s income is low enough, their bill is reduced to $0. And after 20 or 25 years, any remaining debt is erased.
HOW IS BIDEN’S PLAN DIFFERENT?
As part of his debt relief plan announced last year, Biden said his Department of Education would create a new payment plan based on income that would lower payments even further. It became known as the SAVE Plan, and is generally intended to replace existing plans based on income.
Borrowers will be able to apply later this summer, but some of the changes will roll out gradually over time.
Immediately more people will be eligible for $0 payments. The new plan will not require borrowers to make payments if they earn less than 225% of the federal poverty line: $32,800 a year for a single person. The limit for current plans, by contrast, is 150% of the poverty line, or $22,000 a year for a single person.
Another immediate change is aimed at preventing interest from snowballing.
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As long as borrowers make their monthly payments, their total balance will not increase. Once your adjusted monthly payment is met, even if it is $0, any remaining interest will not apply.
Other important changes will take effect in July 2024.
Notably, undergraduate loan payments will be capped at 5% of discretionary income, up from 10% today. Those with graduate and undergraduate loans will pay between 5% and 10%, depending on the original balance of the loan. For millions of Americans, monthly payments could be cut in half.
This coming July will also bring a faster path to loan forgiveness. Thereafter, borrowers with beginning balances of $12,000 or less will have the remainder of their loans paid off after 10 years of payments. For every $1,000 borrowed beyond that, the payoff will occur after an additional year of payments.
For example, a borrower with an original balance of $14,000 would get all the outstanding debt after 12 years. Payments made before 2024 will count toward forgiveness.
HOW DO I SIGN UP?
The Department of Education says it will notify borrowers when the new application process launches this summer. Those enrolled in an existing plan known as REPAYE will automatically be moved to the SAVE plan. Borrowers may also register by contacting their loan servicers directly.
It will be available to all borrowers in the Direct Loan Program who are current on their loans.
WHAT ARE THE PROS AND CONS?
Supporters say Biden’s plan will simplify payment options and offer relief to millions of borrowers. The Biden administration has argued that mounting student debt puts college out of reach for too many Americans and financially hampers borrowers.
Opponents call it an unfair benefit to those who don’t need it, saying it passes a heavy cost on taxpayers who have already paid off student loans or didn’t go to college. Some worry it will give colleges an incentive to raise tuition prices, knowing many students will have their loans paid off later.
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Voices from across the political spectrum have said that it amounts to a form of free university. Biden campaigned on a promise to make community college free, but failed to win congressional support. Critics say the new plan is an attempt to do something similar without congressional approval.
IS IT LEGAL?
That depends on who you ask, but the question has not been addressed by a federal court.
Rather than create a new payment plan from scratch, the Biden administration proposed changes to an existing plan. He cemented those changes by going through a negotiated rulemaking process that allows the Department of Education to develop federal regulations without Congress.
It is a process commonly used by the administrations of both political parties. But critics question whether the new plan goes beyond what the law allows.
More than 60 Republican lawmakers urged Education Secretary Miguel Cardona to withdraw the plan in February, calling it “reckless, fiscally irresponsible and flagrantly illegal.”
Supporters argue that the Obama administration used its authority in a similar way to create a payment plan that was more generous than any other at the time.
The Biden administration formally ended the rule this month. Conservatives believe it is vulnerable to a legal challenge, with some saying it’s just a matter of finding a plaintiff with the legal right, or legal standing, to sue.
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