Joe Biden’s new student-loan plan is an important and large step forward on student debt forgiveness in the US even after a previous debt reduction program was controversially struck down by the supreme court, advocates say.
When the justices ruled against Biden’s plan to forgive up to $20,000 in federal student loans per borrower in June, 40 million debt-burdened Americans were left with questions – especially as monthly payments would resume in October after being paused for over three years because of the Covid pandemic.
But a new federal student loan repayment plan announced earlier this summer, Saving on a Valuable Education (Save), promises sweeping changes to other income-driven repayment plans of the past.
Although Save falls short of the original debt forgiveness scheme, it will still bring significant relief to borrowers, according to Mike Pierce, the executive director of the Student Borrower Protection Center.
Pierce, whose organization was involved in helping the Biden administration design the new Save plan, said: “There are things that we love about it. There are things that could have been done a little bit better, but, on the whole, it is a big step forward.”
Pierce added: “It will fix a bunch of really broken parts of the student loan safety net.”
Perhaps most notably, Pierce said, are the new rules surrounding interest. Along with lower minimum monthly payments, a borrower’s debt will not increase from compound interest as long as payments are made in full, consistently and on time. In the past, even if a borrower never missed a minimum payment, debt would balloon.
Pierce said: “Borrowers used to be able to enroll in payment plans to make monthly payments, and watch the balance grow and grow and grow because those payments didn’t keep up with the interest charges. And this new plan ends that practice. You can’t get underwater on your student loan any more.”
This alone can save borrowers thousands of dollars in the long run.
Although Save does not guarantee that debt will be immediately forgiven, it does shave chunks off the total amount of debt owed for many borrowers. And in some cases, it will save borrowers more than the amount forgiven under the original plan.
Save also changes things for married borrowers. In the past, these borrowers had to include their spouse’s income on their chosen repayment plan, which raised the minimum payment on their loans. Now, borrowers only have to include their income, regardless of their marital status.
And perhaps the biggest change in federal student loans is aimed at low-income borrowers. Individuals who make $15 an hour ($32,805 annually) or less will have a $0 monthly payment. The department of education estimates this will affect up to 1 million additional borrowers.
Pierce said: “For those folks, you can think about this as just a continuation of the payment pause. Not only are they not making payments, but they’re also not getting charged interest.”
One significant group of borrowers have been left out of the new plan for student debt relief: parents. Parents and caregivers who took out a Parent Plus loan to pay for their children’s college education will not see any lower monthly payments.
Pierce said: “That means [parent borrowers] are going to continue to struggle. Maybe the only option they have in front of them is skipping their monthly payments and ending up in default. That’s a big gap. It’s something that we had hoped this administration would take care of here. It just didn’t make it to the final cut.”
For everyone else, loans will be forgiven no matter what after a maximum of 25 years, and Pierce said all borrowers should expect even more changes to the student loan system coming next summer.
He said: “The supreme court snatched away debt relief from tens of millions of working people. We thought that 20 million people were going to be debt-free and never have to go back into the student loan system at all. So, compared to that, this is a thin rule for lots of folks.
“As income-driven payment plans go, this is the best shot that anybody’s taken at building a real student loan debt plan that works for everybody.”
