Joe Biden’s new student loan plan is an important and big step forward in student debt relief in the US, even after a previous debt-reduction program was controversially rejected by the Supreme Court, supporters say.
When judges ruled in June against Biden’s plan to forgive up to $20,000 per borrower on federal student loans, 40 million debt-ridden Americans were left with questions — particularly since monthly payments would resume in October after being forced to owe money which had been suspended for more than three years due to the Covid pandemic.
But earlier this summer, a new state student loan repayment schedule was announced. Save on a valuable education (Save)promises far-reaching changes from other income-based repayment plans of the past.
Although Save falls short of the original debt relief program, it will still bring significant relief to borrowers, according to Mike Pierce, executive director of the Student Borrower Protection Center.
Pierce, whose organization was involved in helping the Biden administration shape the new Save plan, said, “There are things we love about it. There are things that could have been done a little better, but overall it’s a big step forward.”
Pierce added, “It will fix a bunch of really broken parts of the student loan safety net.”
Perhaps most notable are the new interest rate rules, Pierce said. Along with lower minimum monthly payments, compound interest does not increase a borrower’s debt as long as payments are made in full, consistently, and on time. Even if a borrower never missed a minimum payment in the past, the debt would skyrocket.
Pierce said, “In the past, borrowers could enter into payment plans to make monthly payments and watch the balance grow bigger and bigger because those payments weren’t keeping pace with interest expense.” And this new plan ends that practice. You will no longer get lost with your student loan.”
This alone can save borrowers thousands of dollars in the long run.
Although Save does not guarantee immediate debt forgiveness, for many borrowers it does save some of the overall debt. And in some cases, this saves borrowers more than the amount forgiven in the original plan.
Save is also changing things for married borrowers. In the past, these borrowers had to factor their spouse’s income into their chosen repayment schedule, increasing the minimum payment on their loans. Now borrowers only need to provide their income regardless of their marital status.
And perhaps the biggest change in federal student loans is aimed at low-income borrowers. People making $15 per hour ($32,805 per year) or less will be paid $0 per month. The Department of Education estimates that up to 1 million additional borrowers will be affected.
Pierce said, “The supreme court snatched away debt relief from tens of millions of working people. We thought that 20 million people were going to be debt-free and never have to go back into the student loan system at all. So, compared to that, this is a thin rule for lots of folks..”
A key group of borrowers has been left out of the new student debt relief plan: parents. Parents and caregivers who took out a Parent Plus loan to fund their children’s college education will not see lower monthly payments.
Pierce said: “That means [parent borrowers] are going to continue to struggle. Maybe the only option they have in front of them is skipping their monthly payments and ending up in default. That’s a big gap. It’s something that we had hoped this administration would take care of here. It just didn’t make it to the final cut.”
Everyone else will have their loans forgiven after a maximum of 25 years, and Pierce said all borrowers should expect more changes to the student loan system next summer.
He said, “The Supreme Court took tens of millions of working people out of debt relief.” We figured 20 million people would be debt-free and never have to go back into the student loan system. In comparison, this is a flimsy rule for many people.
“As income-driven payment plans go, this is the best shot that anybody’s taken at building a real student loan debt plan that works for everybody.”