President pushes ahead with a new student debt relief plan
This is United States President Joe Biden’s latest response to the 30 June decision of the Supreme Court of the United States (SCOTUS) which held that the debt-relief plan announced over a year ago, in August 2022, lacked legislative authority and was therefore unconstitutional.
Since the SCOTUS decision, the administration has announced programmes totalling US$116 million to help Americans hobbled by high student debt.
Among these programmes is the forgiving of US$72 million in loans to students who attended the for-profit Ashford University (San Diego, California) because, according to the Department of Education, Ashford “made substantial misrepresentations . . . that borrowers relied upon to their detriment”.
In his statement announcing the Saving on a Valuable Education (SAVE) plan on 22 August, just weeks before the end of the hiatus on collection of student debts that dates back to the early days of the COVID pandemic, Biden stressed that borrowers who are already part of the REPAYE (income-driven) repayment plan will automatically be enrolled in the new SAVE plan.
Biden urged those who are not enrolled in the REPAYE plan but think that the SAVE plan applies to take the 10 minutes to fill out the application.
“If you’re eligible for the SAVE plan,” said the president, “sign up now, so you can lower your monthly payments in advance of payments resuming this fall.”
In a press release Secretary of Education Miguel Cardona said: “The SAVE plan is another huge step forward in President Biden’s tireless efforts to fix the broken student loan system, reduce the burden of student debt on working families, and put borrower’s first.
“SAVE isn’t just about helping borrowers today, it’s about creating a more affordable pathway for millions of aspiring students who dream of earning college degrees and achieving the American dream.”
Although Dr Alí Bustamante, deputy-director of the New York-based Roosevelt Institute’s Worker Power and Economic Security programme, would have liked to see the cancellation of student debt, he welcomed the SAVE programme.
“The new SAVE plan captures the administration’s changes to the income-driven repayment plan – determining payment amounts based on 5% of the borrower’s disposable income instead of 10%,” he said.
“Any effort to lower the burden of student debt is welcome and the SAVE plan has the potential of cutting most monthly payments in half and even eliminating the payments for lower-income borrowers altogether. We’re likely to see average monthly payments dropping from about $400 a month to $200 a month,” he added.
Presidential hopefuls line up to cheer
Just over a year ago, Biden announced his government’s plan to deal with the US$1.6 trillion in outstanding student debt. The centrepiece of that plan was forgiveness of US$10,000 for people earning less than US$125,000 (US$250,000 for married couples) and up to US$20,000 for former Pell Grant recipients, the nation’s poorest students.
Additionally, the president asked Congress to halve the 10% cap on monthly payments to 5% of the borrower’s discretionary income.
The skyrocketing debt “is a significant burden on America’s middle class”, a White House statement said at the time. “Middle-class borrowers struggle with high monthly mortgage payments and ballooning balances that make it harder for them to build wealth, like buying homes, putting money away for retirement, and starting businesses.”
Senate Minority Leader Republican Mitch McConnell was quick to reject Biden’s plan, tagging it with the perennial American political bogeyman ‘socialism’.
“President Biden’s student loan socialism is a slap in the face to every family who sacrificed to save for college, every graduate who paid their debt, and every American who chose a certain career path or volunteered to serve in our Armed Forces in order to avoid taking on debt,” he said.
This past July, after the SCOTUS ruled against Biden’s 2022 plan, Republican presidential hopefuls lined up to cheer
“Joe Biden’s massive trillion-dollar student loan bailout subsidises the education of elites on the backs of hard-working Americans, and it was an egregious violation of the Constitution for him to attempt to do so unilaterally with the stroke of the executive pen,” tweeted former Vice-President Mike Pence, who is running for the 2024 Republican nomination for president.
“I am pleased that the court struck down the radical left’s effort to use the money of taxpayers who played by the rules and repaid their debts in order to cancel the debt of bankers and lawyers in New York, San Francisco, and Washington, DC,” he said.
In a quickly-produced 30-second advertisement, Tim Scott of South Carolina, the only black Republican in the Senate and who is also running for the 2024 Republican nomination, said in part: “Joe Biden wants you to pay off the student loans of lawyers and professors. I want to strengthen vocational education and apprenticeships. We need more welders, carpenters and electricians. These are the jobs that built America, and these are the jobs that liberal elites can’t ship to China.”
For his part, Biden held little back, slamming the “hypocrisy” of the Republicans in Congress who supported the Paycheck Protection Program (during the COVID pandemic), “which was designed to help business owners who lost money because of the pandemic. It was a worthy program.
“But let’s be clear, some of the same elected Republican members of Congress (for example, Marjorie Taylor Greene [Georgia], Lauren Boebert [Colorado] and multimillionaire senator Rick Scott [Florida]), who strongly opposed aid to students got hundreds of thousands of dollars themselves because of the businesses they were able to keep open.”
One of the key drivers of former-student indebtedness is interest capitalisation. Students who took out loans to finance their undergraduate education, for example, had their repayments deferred if they went on to graduate school.
However, under the old rules, interest continued to accrue during this period. Former students who encountered financial difficulty because of, for example, the loss of a job, were eligible to apply for forbearance; likewise, interest continued to accrue on these loans.
Interest capitalisation is especially punitive to black borrowers because they typically take out more loans than do their white peers (US$23,400 vs US$16,000) and because blacks typically earn 10% less, according to a paper published by the Brookings Institute. In 2019, 75% of blacks who took out student loans to finance higher education owed more than they had borrowed as compared with 48% of whites.
Biden’s SAVE plan eliminates the compounding of interest as long as the borrower pays their monthly payment. For example, if the monthly payment is US$50 and the interest is US$30, as long as the borrower pays US$20, no interest will accrue for that month.
The Department of Education estimates that approximately 70% of borrowers in the SAVE plan will benefit from this change. According to the White House Council of Economic Advisers the end of interest capitalisation “could prevent a lower-income borrowers’ balance from increasing nearly 78% over a 20-year repayment period”.
Help for historically marginalised groups
The SAVE plan is tailored to help low income and minority borrowers, a disproportionate number of whom are low income. Those borrowers whose incomes are higher than US$33,000 for a single person (or US$67,500 for a family of four) will see a 5% reduction in their payments.
By contrast, the approximate one million borrowers who earn US$15 per hour (the federal minimum wage) and who are disproportionately black, Hispanic or members of other minorities, will have their debt repayments reduced to US$0.0.
As many as 83% of community college borrowers will be debt-free within 10 years because of the provision for early forgiveness for low-balance borrowers.
Since blacks and Hispanics account for almost half of the 3.2 million students enrolled in community colleges (39 percentage points higher than they are in the general population) this provision too disproportionately aids these groups.
According to official statistics, there are 1.7 million whites and 1.5 million blacks and Hispanics enrolled in community colleges. Among the general US population, Whites account for 58.5 % of the population while the combined figure for blacks and Hispanics is 32.7% of the population.
While the SAVE plan helps all financially distressed borrowers, the Biden administration is not chary about pointing out how the plan helps historically marginalised groups who, for a myriad of racist reasons, are disproportionately more likely to be caught in a debt trap.
“On average, black, Hispanic, American Indian and Alaska Native borrowers will see their total lifetime payments per dollar borrowed cut in half,” says the Fact Sheet supplied by the Department of Education.
Bring forgiveness a little closer
The SAVE plan will accelerate the discharge of non-performing loans by providing for early forgiveness for low-balance borrowers. At present, borrowers, even those who could not meet their payments – and, thus, saw the balance owing increase because of the capitalisation of interest – had to wait either 20 or 25 years (depending on the type of loan) before applying for forgiveness of the outstanding balance.
“Under the SAVE plan, borrowers whose original balances were $12,000 or less [a group that disproportionately includes community college students] will receive forgiveness after 120 payments (the equivalent of 10 years in repayment).
“For each additional $1,000 borrowed above that level [$12,000], the plan adds an additional 12 payments (equivalent to 1 year of payments) for a maximum of 20 or 25 years,” says the department’s Fact Sheet. For example, if a borrower’s original principal balance is US$14,000, they will see forgiveness after 12 years.
Payments made before 2024 will count towards the years of repayment necessary for forgiveness, though the government has not indicated how many borrowers will on the basis of this provision receive immediate, or will qualify in the near-term for, forgiveness.
Likely line of attack
Republican politicians have been uncharacteristically quiet since the SAVE plan was announced.
However, statements like: “The administration’s Income-Driven Repayment rule is nothing more than a backdoor attempt to provide free college by executive fiat … Make no mistake, I soundly reject this illegal abuse of power”, made by Representative Virginia Foxx, a North Carolina Republican who chairs the House Education and the Workforce Committee, suggest what line of attack is most likely.
When Bustamante was asked if the SAVE plan could be challenged in court, he said: “Critics of student debt relief will also likely attack the SAVE plan by challenging the president's authority to modify the IDR [income-driven repayment] disposable income threshold without congressional approval.
“However, the state attorneys general that brought the initial Supreme Court case are likely to lack standing to challenge the SAVE plan because the SAVE plan reflects prior IDR disposable income threshold reductions made by past administrations.”