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Biden’s Plan B: Here’s What Student Loan Borrowers Can Expect Now

The Supreme Court ruled on Friday that President Joe Biden’s student loan forgiveness plan cannot proceed as planned, but that doesn’t mean relief isn’t on the way. Just a few hours after the Supreme Court’s decision, Biden revealed his backup plan to provide relief to borrowers.

There are a few different steps Biden and his administration are planning to take in order to make the resumption of student loan payments a little easier, and to eventually provide debt relief to those who need it most. Here’s a rundown of the important details you need to know.

College students on laptops.

Image source: Getty Images.

Student loan payments resume in October — or do they?

As part of the recent debt ceiling legislation, the interest and repayment pause that has been in effect for federal student loan debt since early 2020 is ending after Aug. 30. Interest is set to begin accumulating on Sept. 1 and payments will be due beginning in October.

To help ease the burden on borrowers, Biden announced a “12-month on-ramp” to repayment that runs through Sept. 30, 2024. During this time, interest will be running and payments will be due.

However, any missed payments during this 12-month grace period are not considered delinquent. They won’t be reported to credit bureaus, and the Department of Education won’t pursue any collection activities. What’s more, interest will not capitalize at the end of the period. In other words, borrowers who need more time to restart payments can have up to a year, with no adverse consequences.

The administration is encouraging borrowers who can comfortably make payments to do so as soon as possible, but there’s no special action needed to take advantage of the extra time.

A budget-friendly repayment plan

In Biden’s initial student loan relief proposal, he revealed a plan to create a new income-driven payment program that would cut many borrowers’ payment obligations in half (or more).

This plan has now been finalized. The plan is known as the Saving on a Valuable Education (SAVE) plan, and is estimated to save borrowers at least $1,000 per year on their loan payments. Here’s a rundown of the details:

  • Required monthly payments are capped at 5% of discretionary income for undergraduate loans, half of the amount required under the most generous plans that have already been in place (10% for graduate loans).
  • Increase the definition of “discretionary income” to that in excess of 225% of the federal poverty level (currently 150%), so less income is included in the payment calculation.
  • Forgives any remaining balance after 20 years of repayment in an income-driven plan, or 10 years for loans with original balances below $12,000.
  • Does not add unpaid interest to the outstanding balance, so no borrower’s balance will grow if they make their required payment.

Could broad debt forgiveness still happen?

According to the fact sheet released by the White House, “The Secretary of Education initiated a rulemaking process aimed at opening an alternative path to debt relief for as many working and middle-class borrowers as possible, using the Secretary’s authority under the Higher Education Act.”

It’s not clear at this point what exactly this could mean, but the general translation is that the Biden administration is aiming to find a way to forgive as much student debt as possible through another legal argument. For context, the failed plan to forgive up to $20,000 per borrower relied on a law that allowed the executive branch to modify student debt programs during disasters (like the COVID-19 pandemic).

It’s important to note that even if another loan forgiveness plan is initiated, it wouldn’t be surprising to see it face legal challenges and take months before anything can actually happen. However, the key point is that even though the Supreme Court rejected the initial plan, that doesn’t exactly mean debt forgiveness is necessarily dead.

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