Despite the recent Supreme Court ruling against the Biden administration’s proposal for student loan forgiveness, efforts to alleviate student debt persist. The administration has already taken steps to provide loan forgiveness through alternative means.
One significant development from the Department of Education is the introduction of the SAVE plan, a revised version of the existing REPAYE plan. Both plans fall under the category of income-driven repayment plans (IDR). IDR plans operate by capping borrowers’ monthly payments based on their income, with calculations linked to the poverty line.
Under the new guidelines, individuals earning 225% of the federal poverty rate, such as $32,805 for an individual or $67,500 for a family of four, will have their income entirely shielded from payments. This translates to a required payment of $0. Even borrowers who earn more but qualify for the SAVE plan will experience reduced payments.
Concerns about the interest accumulating uncontrollably due to these low or zero-dollar payments may arise. However, the administration has imposed interest rate caps to prevent loan balances from spiraling out of control. Thus, with no interest accumulation and required payments of $0, this approach can be seen as a form of shadow forgiveness.
Furthermore, IDR plans already provided loan forgiveness to borrowers who made payments for 20-25 years. As a result, borrowers enrolled in Biden’s new SAVE plan with minimal payments will eventually see their loan balances vanish under the existing rules.
For instance, if a borrower qualifies for a $100 monthly payment and continues to make payments for 20 years, they will have repaid a total of $24,000 (without factoring in present value). If their initial student loan was $50,000, this equates to $26,000 in forgiveness—exceeding Biden’s rejected promise of $10,000 in forgiveness.
Additionally, borrowers can receive even greater forgiveness if they work in government or non-profit positions. Under the Public Service Loan Forgiveness program, eligible jobs in the public and non-profit sectors can qualify for forgiveness after only ten years of repayment. In the previous example, this would increase the forgiveness amount to $38,000 out of the $50,000 loan.
Considering the cost of our current student loan system, the ramifications of this complex shadow forgiveness program extend beyond the monetary value of forgiveness, which taxpayers ultimately bear. One troubling aspect is how it distorts the incentives for future generations to make career choices. The current system, compounded by the Biden administration’s new plans, encourages and rewards individuals who take out substantial student loans to pursue careers not highly valued by consumers.
Furthermore, the new repayment program exacerbates the use of the Public Service Loan Forgiveness program, discouraging individuals from pursuing value-creating jobs in the private sector and instead directing them towards wealth-extracting public sector positions. The untapped benefits that could have been realized if individuals were left to finance their education and make career decisions remain largely unseen.
On the other hand, many individuals will directly benefit from these programs, making them difficult to terminate due to their perceptible impact. While some may view the Supreme Court’s ruling as the end of loan forgiveness, it is important to note that as long as the Department of Education retains administrative control over the student loan system, loan forgiveness remains within reach through a few bureaucratic adjustments.
At this juncture, the only viable avenue for the Supreme Court to intervene would be to declare the Department of Education itself unconstitutional. However, such an outcome is highly improbable. Unfortunately, the Biden administrative state is working diligently to find alternative ways to forgive student loans, and it will always be at the taxpayer’s expense.