President Joe Biden has announced that his administration will pursue alternative avenues to provide relief to millions of borrowers following the Supreme Court’s recent ruling to block the current administration’s student loan forgiveness proposal. In a White House address on June 30, President Biden expressed his commitment to delivering borrowers the support they need, particularly those at the lower end of the economic scale.
To achieve this, the Department of Education has initiated a regulatory rulemaking process to pave the way for debt relief. Under the authority granted to them by the Higher Education Act, the Department of Education has finalized the Saving on a Valuable Education (SAVE) plan, which offers the most affordable repayment plan ever created. This plan is an income-driven repayment (IDR) scheme that limits borrowers’ monthly payments to a percentage of their income.
Through the SAVE plan, borrowers with undergraduate loans will only need to make payments equivalent to 5 percent of their discretionary income, reduced from the previous 10 percent requirement. The Biden administration estimates that this adjustment could save borrowers approximately $1,000 per year. Additionally, the plan includes student loan forgiveness for borrowers with balances of $12,000 or less after ten years of consistent payments, instead of the original 20 years.
It is important to note that the SAVE plan is expected to be available from July 2024, as the White House intends to implement the program in phases. However, sign-ups for the program could potentially begin as early as this summer. This phased approach will ensure a smooth transition and effective implementation of the plan.
Though the Biden administration presents the SAVE plan as a form of debt cancellation, some critics argue that it simply changes the terms of repayment rather than transferring any debt. However, by setting monthly payments at $0 for a significant number of borrowers and providing loan forgiveness after a certain number of payments, it effectively functions as a more convoluted form of debt cancellation.
The Education Department projects that the cost of the SAVE plan will amount to $138 billion over a decade. However, the Penn Wharton Budget Model suggests a higher price tag, estimating between $333 billion and $361 billion over the ten-year period. Other estimates vary, with the Congressional Budget Office (CBO) projecting a total cost of around $230 billion, while the Foundation for Government Accountability (FGA) places the final tally at $471 billion.
Despite the aim of the Biden administration to support working and middle-class borrowers, critics argue that these relief efforts will have negative consequences for everyone. They believe that this program could result in an additional trillion dollars of federal expenditure over the next decade. They also express concerns that these programs will contribute to tuition inflation, as colleges may take advantage of the availability of more funding and raise the cost of education.
The U.S. government has been involved in student loan guarantees through programs like the Federal Family Education Loan (FFEL) program since 1965. Over the years, tuition costs have skyrocketed, with the average annual cost of tuition at a public four-year college now being approximately 37 times higher than in 1963. Tuition inflation has steadily increased for the past 45 years, creating a burden for many students. Some economists worry that the income-driven repayment plan may subsidize low-quality education programs and weaken accountability practices.
Despite potential challenges, experts anticipate that the SAVE plan may face fewer legal obstacles compared to the previous student loan forgiveness proposal. As the policy is not harmful, it would be difficult to argue against it in court.
In conclusion, President Biden’s administration is determined to provide relief to borrowers through alternative means after the Supreme Court’s ruling on student loan forgiveness. The SAVE plan offers an income-driven repayment scheme that reduces monthly payments and includes loan forgiveness. While critics raise concerns about the cost and potential impact on tuition inflation, the Biden administration remains committed to supporting borrowers, particularly those with lower incomes. The phased implementation of the SAVE plan will ensure a smooth transition and effective delivery of relief.