What Comes Next for Student Loan Borrowers?

The Supreme Court Friday ruled, in a 6-3 decision, against President Joe Biden’s student debt relief program. The debt relief would have forgiven $10,000 for non-Pell Grant recipients and $20,000 for Pell Grant recipients if they were earning less than $125,000 a year. The order would have forgiven approximately $430 billion in student debt.

The Supreme Court ruled that the Biden Administration exceeded its authority under the HEROES Act, a federal law first enacted in response to the Sept. 11 terrorist attacks, to “waive or modify” legal provisions related to student loans.

The Court held that “The Secretary’s power under the Act to ‘modify’ does not permit ‘basic and fundamental changes in the scheme’ designed by Congress.” Nor can the Administration claim they are waiving the debt because “the Secretary’s invocation of the waiver power here does not remotely resemble how it has been used on prior occasions, where it was simply used to nullify particular legal requirements.”

Other elements of the debt relief program that were not struck down, but are still hugely significant for borrowers, were finalized on Friday. Student loan borrowers’ monthly minimum payments will now be capped at 5% of discretionary income, down from 10%. The formula for calculating “discretionary income” was also changed for this purpose. It is now measured at 225% of the federal poverty line, up from 150%. This means that the minimum payments for many borrowers, especially for the more indebted, will be reduced.

Secondly, balances older than ten years will be forgiven, provided the original balance was $12,000 or less. This has been reduced from balances older than 20 years.

The interest on student loans will resume accruing on September 1, and the first repayments will come due in October. Biden cannot extend the debt accrual and repayment pause because of the debt ceiling budget deal he reached with House Speaker Kevin McCarthy in May.

Biden did however create an “on ramp” for the resumption of payments. Though interest will begin to accrue this September, the Department of Education will not send late or missed payment information to credit agencies for payments due until September 2024.

Employers interested in overall financial wellness and financial education can highlight some of this news to their participants to assist them in their financial planning, as well helping to address anxiety employees may be experiencing about the accrual and repayment resumptions. The debt forgiveness elements that the Supreme Court rejected have received more headlines than those that remain.

The SECURE 2.0 Act of 2022 also permits retirement plan sponsors to match, with contributions to a defined contribution plan, participants’ student loan repayments starting in 2024. The date at which sponsors can start providing this benefit is all but certain to be later than January 1, 2024, when it is legally permitted. The IRS and Department of Labor have yet to issue regulatory guidance on this measure, and many sources say it is unclear if recordkeepers will be prepared to support it for sponsors on their platforms.