Biden Plan Wipes Out $39B In Student Loan Debt For 804,000 Borrowers

ACROSS AMERICA — The Biden administration has taken another crack at the student loan debt ciris with a plan that wipes out billions of dollars in debt for 804,000 borrowers eligible for income-driven repayment plans.

On Friday, the Education Department began notifying the borrowers who collectively owe $39 billion that their federal student loan balances will automatically be cleared.

The action applies only to borrowers enrolled in one of four income-driven repayment plans, which overall aim to lower payments for low-wage earners. The majority are borrowers enrolled in the ICR, or income-contingent repayment plan, who have been paying back their loans for decades. The average borrower in that program owes about $48,000.

Monthly payments are generally capped at 10 percent or 20 percent of the borrower’s household discretionary income. Borrowers who have made regular payments for 20 or 25 years generally see their balances forgiven when they meet the caps, but the system hasn’t worked as intended, Education Secretary Miguel Cardona said in a statement.

“For far too long, borrowers fell through the cracks of a broken system that failed to keep accurate track of their progress towards forgiveness,” Cardona said.

The Education Department will continue to identify and notify borrowers who reach the forgiveness thresholds every two months until next year, when all borrowers who are not yet eligible for forgiveness will have their payment counts updated, the administration said.

The Saving on a Valuable Education (SAVE) Plan was announced last year, but has been mostly overshadowed by President Joe Biden’s broader forgiveness plan that was struck down by the U.S. Supreme Court.

Biden called the program “the most affordable repayment plan ever,” and said typical borrower who enrolls in the plan will save $1,000 a month. It is estimated to cost $230 billion over 10 years, according to the Congressional Budget Office. Estimates from researchers at the University of Pennsylvania put the cost at up to $361 billion.

The SAVE Plan is generally intended to replace existing income-driven plans. Borrowers will be able to apply later this summer, but some of the changes will be phased in over time.

The new plan won’t require borrowers to make payments if they earn less than 225 percent of the federal poverty line — $32,800 a year for a single person. The cutoff for current plans, by contrast, is 150 percent of the poverty line, or $22,000 a year for a single person.

It also stops interest from snowballing. As long as federal student loan borrowers are making monthly payments, accumulating interest won’t cause their balances to balloon.

Other major changes take effect in July 2024.

Most notably, payments on undergraduate loans will be capped at 5 percent of discretionary income, down from 10 percent now. Those with graduate and undergraduate loans will pay between 5 percent and 10 percent, depending on their original loan balance. For millions of Americans, monthly payments could be reduced by half.

Next July will also bring a quicker road to loan forgiveness. Starting then, borrowers with initial balances of $12,000 or less will get the remainder of their loans canceled after 10 years of payments. For each $1,000 borrowed beyond that, the cancellation will come after an additional year of payments.

For example, a borrower with an original balance of $14,000 would get all remaining debt cleared after 12 years. Payments made before 2024 will count toward forgiveness.

The plan could set the stage for the next battle in the legal fight over student loan relief.

Republicans have fought against the plan, saying it oversteps the president’s authority. Sen. Bill Cassidy, the ranking Republican on the Health, Education, Labor, and Pensions Committee, called it “deeply unfair” to the 87 percent of Americans who don’t have student loans.

Supporters say Biden’s plan will simplify repayment options and offer relief to millions of borrowers. The Biden administration has argued that ballooning student debt puts college out of reach for too many Americans and holds borrowers back financially.

Opponents call it an unfair perk for those who don't need it, saying it passes a heavy cost onto taxpayers who already repaid student loans or didn’t go to college. Some worry that it will give colleges incentive to raise tuition prices higher since they know many students will get their loans canceled later.

Voices across the political spectrum have said it amounts to a form of free college. Biden campaigned on a promise to make community college free, but it failed to gain support from Congress. Critics say the new plan is an attempt to do something similar without Congress’ approval.

Federal courts have not taken up whether the plan is legal. Instead of creating a new payment plan from scratch, the Biden administration proposed changes to an existing plan. It cemented those changes by going through a negotiated rulemaking process that allows the Education Department to develop federal regulations without Congress.

It’s a process that’s commonly used by administrations from both political parties. But critics question whether the new plan goes further than the law allows.

More than 60 Republicans lawmakers urged Cardona to withdraw the plan in February, calling it “reckless, fiscally irresponsible, and blatantly illegal.”

Supporters argue that the Obama administration similarly used its authority to create a repayment plan that was more generous than any others at the time.

The Biden administration formally finalized the rule this month. Conservatives believe it’s vulnerable to a legal challenge, and some say it’s just a matter of finding a plaintiff with the legal right — or standing — to sue.

The Associated Press contributed reporting.

Editor's note: A typographical error in the headline has been corrected. The amount of debt to be erased is $39 billion.