The Supreme Court will hear arguments on Feb. 28 to decide whether the Biden administration overstepped its authority with its agenda to eliminate billions of dollars in student debt. In the meantime, the fate of student loan debt for millions of Americans hangs in limbo. No debt has been canceled as of now and the Education Department has put a halt on accepting applications amid legal challenges.
What will happen if the Supreme Court strikes down President Joe Biden’s plan to wipe out billions in student loan debt, letting down millions of Americans? When will the repayment pause be lifted, prompting the indebted to resume paying down their federal loans for the first time since March 2020? Lastly, what should those with student loan debt be doing in the meantime to prepare for a possible worst-case scenario?
The Pause in Payments Will Lift No Matter What
“The Administration has already stated that the moratorium on federal student loan payments will resume 60 days after litigation concludes or debt relief has been implemented,” said Laurel Taylor, CEO and founder of Candidly. “That means that if the Supreme Court rules against the administration, we can expect the payment freeze to end shortly thereafter without borrowers receiving the forgiveness that had been previously offered in the president’s plan. This could have devastating consequences for the morale of student loan borrowers, many of whom (a) haven’t made a payment in three years and have reallocated the average monthly student loan payment of $393 to other life expenses and (b) are counting on $10k-$20k of forgiveness to eliminate or lower their monthly payment due to re-amortization of the remaining balance.”
Borrowers Are Likely To Feel Spurned
“Furthermore, whenever there has been a national emergency that has put debt accounts into forbearance, the length of the forbearance period has correlated to delinquency and default rates once borrowers enter back into repayment,” Taylor said. “These borrowers have been in forbearance for three years, and there is speculation that delinquency and default rates could surge to an all-time high, compounded by the fact that many borrowers may feel wronged or misled by false pretenses of forgiveness. Given the multiple extensions, typically announced just days before the end of the moratorium, borrowers may not even find the news of required repayment credible nor compulsory.”
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The Biden Administration Could Explore Other Kinds of Forgiveness, Albeit Less Impactful
If struck down by SCOTUS, the Biden administration would likely fight back, but its plan would probably not be as bold as up to $20,000 in student loan forgiveness per person. It would also depend on what the court allows.
“What action the Biden administration takes will depend on how much authority the Supreme Court gives them,” said James Allen, CPA, CFEI, and the founder of BillPin.com. “If the Court strikes down the entire plan, then the administration will likely pursue other ways of providing relief to student loan borrowers. For example, they could create a new program that would allow borrowers to refinance their loans at lower interest rates. Or, they could provide more funding for income-based repayment plans so that borrowers can reduce their monthly payments based on their ability to pay.”
Taylor points out that the Biden administration has already shown its willingness to explore another type of relief for borrowers in the form of the SECURE Act 2.0.
“In late December 2022, as part of the year-end omnibus spending bill, President Biden signed into law the SECURE Act 2.0, which will allow employers to match the amount an employee pays toward their student loans with a tax-advantaged contribution to their 401(k) or 403(b) retirement plan,” Taylor said. “This is smart, sustainable policy that empowers people to make simultaneous progress on paying down debt and building retirement savings, and provides relief for the nearly three-quarters of student loan borrowers who say they are putting off maximizing their retirement savings until their student loans are paid off.”
Additionally, beyond the one-time debt cancellation measure, this administration has also proposed long-term changes to the Public Service Loan Forgiveness and put forth a proposal for a revolutionary new income-driven repayment plan that would cap monthly payments at just 5% of a borrower’s discretionary income, Taylor said.
“There are phenomenal programs just like these that we should expect the administration to lean into in order to provide relief to borrowers regardless of the outcome of the one-time debt cancellation measures,” Taylor said.
What Those With Student Loan Debt Need To Be Doing
During these uncertain times when a sizable chunk of student loan debt may or may not be forgiven, it’s important that people with student loan debt stay on top of their obligations.
“Regardless of what the Biden administration may do in response to the Supreme Court’s decision, there are a few things that people with student loan debt may want to consider doing right now in case student loan forgiveness is canceled,” said Andrew Lokenauth, founder of Fluent in Finance, who suggests the following:
Consider refinancing your student loans to potentially lower your interest rate and monthly payments.
Create a budget and make a plan to pay off your student loans as efficiently as possible.
Consider setting aside funds in case you need to make unexpected student loan payments in the future.
Explore your repayment options, including income-driven repayment plans and loan forgiveness programs, to determine which may be the best fit for your financial situation.
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This article originally appeared on GOBankingRates.com: Student Loan Debt in 2023: What We Know (and Don’t Know)