What to Expect After Student-Loan Relief Struck Down
On June 30, the Supreme Court struck down Biden’s initial plan for student-debt forgiveness.
The administration’s original plan would have eliminated up to $10,000 in student debt ($20,000 for Pell Grant recipients) among eligible borrowers.
While the Biden administration is working on a workaround plan, I think it’s wise to assume that student debt will not be forgiven in the near future.
What happens now?
Borrowers are scheduled to resume student-debt payments in October. Interest will begin accruing in September.
There will be a 12-month “on-ramp” following the payment resumption during which borrowers who miss payments will not become delinquent and be reported to credit agencies.
Some Democratic lawmakers argue that borrowers should not incur interest during this 12-month on-ramp period, but there is no formal proposal to make this happen now.
In addition, the Department of Education also finalized its new income-driven repayment plan, the Saving on a Valuable Education (SAVE) Repayment Plan, which was designed to reduce monthly payment for lower-income borrowers.
What should I do before October?
If you have federal student loans, I recommend that you confirm your payment plan through the Federal Student Aid website.
In addition, consider saving the amount of each monthly payment you will be required to make into a high-yield savings account.
Not only will this provide you with liquidity when the payments begin, but you will also set the habit of seeing this cash come out of your budget to make room for it in October.
You can make your first few monthly payments from this high-yield savings account or leave your cash reserve intact for emergencies and make your payments using ongoing cash flow.
You can also learn more about How to Prepare for Student-Loan Payments Resuming.
What’s the new plan?
Just hours after the Supreme Court handed down the decision, Biden announced a “Plan B” to cancel student debt using the Higher Education Act 1965, which doesn’t require a national emergency for relief like the HEROES Act of 2003, which was used for the original plan.
The Higher Education Act says the US Education Department can “enforce, pay, compromise, waive, or release any right, title, claim, lien, or demand” related to student debt.
The negotiated-rulemaking process includes hearings and public comment to use the law as foundation for potential student-debt relief.
In short, it could take at least several months to make any headway on using this route to relieve student debt, if it’s even possible at all.
Who’s eligible?
It’s still unclear who might be eligible for relief under the new plan. The same borrowers who benefitted from Biden’s first proposal may or may not qualify for the new proposal.
Should we count on student-debt relief?
I think it’s wise not to count on student-debt relief, particularly in the short term.
Those with federal student loans should expect to begin making monthly payments in October, while interest will begin accruing in September.
Do you have questions about your student loans? Reach out to me at Ben@coveplanning.com or schedule a free consultation call.
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Ben Smith is a fee-only financial advisor and CERTIFIED FINANCIAL PLANNER™ (CFP®) Professional with offices in Milwaukee, WI, Evanston, IL and Minneapolis, MN, serving clients virtually across the country. Cove Financial Planning provides comprehensive financial planning and investment management services to individuals and families, regardless of location, with a focus on Socially Responsible Investing (SRI).
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