The $10,000 in student loan forgiveness that borrowers were counting on was just blocked by the SCOTUS. Here’s what borrowers should do next.
President Biden’s student loan forgiveness plan — which would have completely wiped out the student loan debt of 20 million borrowers — has been blocked by the Supreme Court.
The majority conservative court ruled 6-3 that President Biden does not have the authority to enact the plan, which would have forgiven up to $10,000 of student loans for individuals earning up to $125,000 annually or $250,000 for married couples. Individuals with Pell Grants would have had up to $20,000 eliminated, with the total amount forgiven totaling $430 billion.
“This ruling, while not unexpected, is a huge disappointment to the millions of student loan borrowers already facing pressure from the restarting of payments on existing loans,” says HerMoney CEO Jean Chatzky. “ It’s also a huge blow for the women who hold a disproportionate amount of student debt and — because of the stubborn salary gap — faced increased headwinds in paying it back.”
Indeed, today’s news is a blow to all borrowers, especially after nearly a year of a “will-they, won’t they” cliffhanger, says Bankrate analyst Sarah Foster.
So, Where Do Student Loan Borrowers Go From Here?
1. Restart your payments. Student loan payments that were in forbearance for the last three years are still set to resume starting October 1, and interest will begin accruing again starting September 1 — there will be no more extensions. A borrower’s first priority right now should be to ensure their first payment happens on time. Do that by logging in to your student portal and making sure your bank account information is still accurate. You’ll need to confirm your student loan servicer while you’re at it — there was consolidation in the industry over the last few years, and there’s a chance you might have missed the notification that your loan servicer changed.
2. Breathe a little easier if you miss a payment. The Biden Administration has set up what it’s calling an “on-ramp” to get borrowers back in the swing of making payments. If you miss payments over the next 12 months, you won’t be reported to the credit bureaus and your loans won’t be in default or sent to collections agencies. (But of course, getting back into the habit of on-time monthly payments as quickly as you can is the best option.)
3. Learn more about the new income-based repayment plan. It’s called SAVE (which stands for Saving on a Valuable Education) and it unlike its predecessor, REPAYE which asks undergrads to pay up to 10% of their disposable income toward their federal student loans, it cuts the ask to 5% (or 10% for grad students compared to a previous 15%). It also expands the amount of money that can be sheltered for disposable income — so it is expected to save a lot of people a good amount of money. After 20 years in the program, any remaining undergraduate debt will be cleared (or 25 for graduate debt). Unfortunately Parent PLUS loans aren’t eligible. If you’re already in REPAYE, you’ll be moved over to SAVE. If you’re not, apply here.
Avoiding Common Pitfalls
“The worst thing you can do right now is think, ‘Well, you’re not going to give me forgiveness, so I’m just not going to pay my loans back,’” says Erika Giovanetti, Student Loans Expert at U.S. News and World Report. “”This could be catastrophic. It’s a misconception that you can just not pay — payments are resuming.” Eventually, individuals who don’t pay their loans can face serious hits to their credit reports, penalties, and eventually you could be sued by your loan servicer over the debt, with your wages and tax returns garnished until the debt is paid off.
And while the payment freeze was extended eight times over the last few years, it won’t be extended again, under the agreement reached to extend the debt ceiling. So, if you’ve been in forbearance and were waiting until September to take action, don’t wait any longer to log into your portal and see what’s going on. And don’t think that a missed payment can’t happen to you: Based on prior loan repayment behavior, credit scoring organization VantageScore (which is an average of all three of your credit scores from the three credit bureaus) expects that between 34% to 76% of borrowers may miss their first required payment.
And when it comes to your budget, remember that a lot can change in three years, Foster says. “Borrowers [may have] started families, [bought] homes and [had] children. It all means your finances likely have shifted as well. Turn to your budget to find out how you can make those payments fit in with your finances. Our advice is to start early, and contact your servicer with any questions.”
Are There Other Ways To Get Student Loan Forgiveness?
The good news is that there are additional pathways to get your federal student loans forgiven. “The Biden administration has already made it easier for people to lower their monthly payments via income-driven repayment plans, and have their loans forgiven Public Service Loan Forgiveness (PSLF),” Giovanetti says. Under income-driven repayment plans, if you make on-time payments for a period of 20-25 years, the remainder of your student loan debt can be canceled — making it all the more important that you ensure your first payment in October goes through without a hitch.
Giovanetti recommends checking out the “student loan simulator” at studentaid.gov that can show you what type of repayment plan you’re on — and which one you should be on in order to lower your monthly payments or qualify for forgiveness. “Depending on how much you earn, your payments could be as low as $0 every month,” she says, adding that the income-based repayment calculation ensures that borrowers pay no more than 10% of their disposable income every month toward their loans. In previous years, borrowers had to manually update their income at studentaid.gov, but today your income gets automatically updated via the IRS. Newly-minted high-earners take note: If you were previously on income-based repayment but you increased your earning power substantially over the last three years, you may no longer be on the best plan for your budget — login to your portal and check things out ASAP.
Individuals can also apply for additional forbearance or deferment when needed, Giovanetti says. “If you’re unemployed or going through cancer treatments or have a health condition, there are different types of hardship forbearance, you can apply for,” she explains. “But keep in mind that with most types of forbearance and deferment — unlike the freeze we saw during COVID — interest does accrue.” This means that during the time that you’re not paying loans, the interest will just keep getting piled onto your principal, potentially leaving you with a bigger bill than ever once you’re ready to resume payments.
No matter which of these methods you want to learn more about, or which calculations you need to run, the best place to start your search is at studentaid.gov.
How Will The Biden Administration Respond To The Ruling?
“Law experts say the program goes back to the drawing board. Biden could decide to try again, either by revising the plan or using a different legal rationale. But as the current decision proved, borrowers could still be left waiting for an answer,” Foster says.
And while we now know about the new income-based repayment plan and the “on-ramp” to help people get back to payments safely (see above) there are other possibilities that may come down the line. For example, Giovanetti has heard discussed would be making it easier for borrowers on income-based repayment to receive forgiveness. Right now, if you make on-time payments for a period of 20-25 years, the remainder of your student loan debt can be canceled. “But I can see them shortening that time period — so instead of 20-25 years it would be 10-15,” she says.
There’s also a chance that the Biden Administration could take steps to ensure that the last three years of loan forbearance count towards a borrower’s 20-25 years of on-time payments. Lastly, there’s a chance that the Biden Administration may make it easier to get PSLF — but exactly how they might do that is unclear, Giovanetti says.
The Bottom Line
With student loan payments set to resume at the end of next month, it’s more important than ever that you start putting all your bill-paying best practices in place, many of which you’ve heard here at HerMoney before, but they bear repeating: Pay your loans on time, every time. When possible, pay more than the minimum amount, and if you’re struggling, now is the perfect time to build a budget you love. If you want help with that, we’ve got you covered. The next session of HerMoney’s 8-week financial coaching program, FinanceFixx, starts July 11, and we’d love to see you there!
READ MORE:
- The Top Student Loan Strategies
- How to Start Repaying Your Loans and Become Debt Free
- How Do You Choose A Student Loan?
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