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The Supreme Court heard challenges to President Joe Biden’s student debt relief plan. The proposal, which would cancel between $10,000 and $20,000 in current debt for most borrowers, has been on hold since conservative opponents filed a series of lawsuits last fall. Although lower courts have heard and ruled on the issue, the Supreme Court will have the last word on whether Biden’s plan moves forward.
Given the tenor of oral arguments, the answer is most likely disappointment for the White House. During questioning the six conservative justices indicated that they strongly disagree with the politics of student loan forgiveness, historically a dispositive signal of how this bloc will vote. In doing so, they framed the issue as a “major question,” a recently created and ill-defined doctrine that this Court has used in the past to overturn laws with little further justification.
For millions of borrowers, this will mean the difference between significant relief and ongoing payments. If you’re among them, the question is… what next?
Those who want extra hands-on guidance on how this decision could affect their finances may want to match with a vetted financial advisor for free.
What Is the program?
When Biden ran for president, one of his major campaign promises was general debt relief for student borrowers. This has been a signature issue for young Americans, with collective student debt topping $1.75 trillion at an average 5.8% interest rate.
To help address this issue, in August, 2022 the Biden administration announced a forgiveness program. If allowed to go forward, the plan will forgive up to $10,000 in student debt for all borrowers earning less than $125,000 ($250,000 for married households). Any borrowers who received low-income Pell grants would be eligible for another $10,000, for a combined $20,000 in loan forgiveness.
The Biden administration has framed this plan as an extension of the student debt moratorium that has continued since 2020. This moratorium, put in place by the Donald Trump administration, froze all federal student loans, penalties and interest as a way of helping stabilize the economy during the pandemic. The Trump administration continued to renew the moratorium throughout its time in office, and the Biden administration has done the same.
Payments remain paused while the Supreme Court hears arguments on the Biden administration’s debt relief plan. According to the Department of Education, payments will resume 60 days after the Court issues its ruling. If, for whatever reason, the matter is not resolved at that point, payments will resume in late August.
What should you do next?
If you are one of the estimated 43 million borrowers affected by this plan, how should you prepare for a potential ruling? Loan payments have been on hold for years, but the Biden administration has stated that it will resume collections later this year. Meanwhile, borrowers are waiting on the Supreme Court to find out how much they actually will owe.
So, what should you do while the justices vote? There are a few good options.
If you owe less than the forgiveness amount, maybe wait
For borrowers who owe $10,000 or less ($20,000 in the case of Pell recipients), the correct answer is probably to wait and see.
While the Supreme Court will most likely rule against the Biden administration, the issue is not yet certain. In particular, legal scholars overwhelmingly agree that the plaintiffs have no serious argument on a procedural issue known as “standing.”
The best argument in this case is that the Biden administration misapplied a law known as the HEROES Act and spent money without the proper authorization of Congress. It’s a non-trivial argument, but it also means that the party who was harmed is the House of Representatives. As the injured party, the House must be the one to enforce its own rights.
The House did not sue. The state of Missouri and two private individuals did, on theories that most legal experts consider facially absurd. Neither party has claimed a direct injury, and the two individuals involved have only claimed that the program wouldn’t give them as much money as they’d like. So there is a slim, but real, chance that the Supreme Court will rule for the administration on the basis that the wrong parties brought this case.
While all of that is in motion, loan payments are on pause and (critically) no interest will accrue until they resume. That suspended interest means that, absent individual circumstances, for people who owe less than the eligible forgiveness amount there is no harm in waiting to see what happens next. While chances are slim, if the Biden administration does win this case on procedural grounds there’s no reason to pay down debt that may soon disappear.
Accelerate current payments
If you owe more than the eligible amounts, now is a good time to continue getting a jump on your payments.
It’s important to understand that neither the Biden administration nor Democratic leadership have embraced the idea of wholesale loan forgiveness. So borrowers should not bank (literally and figuratively) on a more expansive program. If you owe more than $10,000/$20,000, that additional debt will remain.
At the same time, as noted above, interest is currently paused on all federal student loans.
This gives you an excellent opportunity to pay down the principal on your loan without interest taking a bite out of each payment. Interest will resume once the moratorium period ends. By paying down this debt right now, you can reduce the impact once it does.
Refinance… maybe
Maybe refinance. Maybe.
Refinancing student loans is a tricky area. This is a lot of debt, often at a fairly high interest rate. Undergraduate borrowers can expect interest rates around 3% to 4%, while graduate borrowers will often pay 7% or more. If you have good credit and a good job, you may be able to refinance these loans to get a better rate. Given the amount of money involved, this can mean significant savings.
There are two asterisks, though.
First, rates across the market are fairly high right now. If you can find a better offer than your current interest rates, by all means consider it. Just remember that a better offer may be hard to find right now.
Second, and much more importantly, refinancing a student loan involves giving up significant protections. Any student loan taken out from or through the Department of Education will offer programs like hardship deferrals, income-based repayment and economic forbearance, all designed to protect you from financial crises and job loss. When you refinance, you pay off the student loan and take out a new, private loan that has none of these guardrails.
It can save you money, but think carefully about the tradeoffs.
Build retirement investments
Retirement savings have hit a crisis point for many Americans, and student debt plays a major part in that. So while you’re waiting to hear what happens next, now is still a good time to boost your retirement account.
We keep hammering this issue, but it’s critical: There is no interest running on your debt right now. So you can use this money as you see fit with no penalty. For some borrowers, this can be a good time to get a jump on paying down the principal. For others, right now might be a good time to accelerate retirement savings. You will be making a tradeoff, but retirement is an extremely valuable investment.
This is particularly true if you’re a recent graduate. Your 20s are when retirement savings can do the most good. At that age, you can maximize compounding returns and ensure the most long-term growth in your accounts.
Consider paying off your student debt right now, since every payment you make is interest-free. But also consider putting that money into a Roth IRA. Even a few hundred dollars here and there, left to grow for 40 years, can turn into something truly spectacular.
Get ahead of default
Finally, if you’re underwater on your loans, absolutely do not wait for repayment to resume. Act now to set up a payment plan.
One of the less-discussed aspects of the student loan pause has been that it reset the status of most borrowers. Unless you were in default, delinquencies and other issues were wiped clean and your account now qualifies as “current.” For millions of borrowers, this suspended collection on debt that they simply could not pay. Unfortunately, that will not last. If the Supreme Court rejects the Biden administration’s loan forgiveness plan, millions of borrowers are poised to default once payments resume. Many will do so either way.
This doesn’t have to happen to you. If you are in trouble, reach out to the Department of Education and (if possible) a financial councilor immediately. The Supreme Court may let this program stand, but don’t count on it. Get help and make a plan while your account and credit is in good shape.
Make a plan for a life without debt
On top of everything else, remember how you spent the last several years. It can be a good template for your future.
The student loan moratorium has been a chance for borrowers to catch up on their finances, putting many young Americans on a sound financial footing for the first time in their adult lives. This has had a dramatic effect.
Student debt has been directly linked to a collapse in milestones like buying homes, having children, starting a new business and even getting married. During the post-pandemic pause, all of this has surged back. New business formation alone more than doubled from the end of 2019 to the end of 2020 and has remained at its highest rate in decades ever since.
Home buying, new births, retirement savings and entrepreneurship are all areas directly linked to student loan-related depression, and all have surged to their highest levels in years since mid-2020.
Even the economy as a whole has seen unexpectedly strong consumer spending and hiring through early 2023. This, too, correlates with debt payment since economists find that every 1% of student debt correlates with a 3.7% decrease in household spending. (Concerning data for those worried about a potential third or fourth quarter recession.)
The point is, for the past two years student borrowers have taken the opportunity to decide how they want to live without monthly debt payments. Now, with collection resuming later this year, the good times will end. But that doesn’t mean you can’t take anything from it. The past few years have been a chance to think about what you want out of life. Use that perspective to build a plan going forward. If you spend 2021 and 2022 thinking about having children, opening a business, buying a home or anything else, don’t let go of those goals.
You’ve seen what’s possible. Now plan to achieve it.
Bottom line
The Supreme Court heard arguments on the Biden administration’s student loan forgiveness plan. While it’s unlikely that the justices will allow the program to stand, borrowers have several months left before payments resume. If you hold federal student loans you can use that time wisely.
Tips for those with student loans
Eric Reed is a freelance journalist who specializes in economics, policy and global issues, with substantial coverage of finance and personal finance. He has contributed to outlets including The Street, CNBC, Glassdoor and Consumer Reports. Eric’s work focuses on the human impact of abstract issues, emphasizing analytical journalism that helps readers more fully understand their world and their money. He has reported from more than a dozen countries, with datelines that include Sao Paolo, Brazil; Phnom Penh, Cambodia; and Athens, Greece. A former attorney, before becoming a journalist Eric worked in securities litigation and white collar criminal defense with a pro bono specialty in human trafficking issues. He graduated from the University of Michigan Law School and can be found any given Saturday in the fall cheering on his Wolverines.
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