WASHINGTON — (FloridaToday.news) — The Biden administration calls it “student loan insurance.” Opponents call it a behind-the-scenes attempt to make college free. And this could be the next battleground in the student loan relief litigation.
Starting this summer, millions of Americans with student loans will be able to sign up for a new repayment plan that offers some of the softest terms ever. Interest will not accumulate as long as borrowers make regular payments. The monthly payments of millions of people will be reduced to zero. And in just 10 years, any remaining debt will be cancelled.
It’s known as the SAVE plan, and while it was announced last year, it was mostly overshadowed by President Joe Biden’s proposal for a massive student loan cancellation. But now, after the Supreme Court overturned Biden’s forgiveness plan, the possibility of paying off the debt is coming to the fore.
Since the ruling, Biden has offered an alternative approach to debt relief and has also turned his attention to a lesser-known initiative, calling it “the most affordable repayment plan ever.” A typical borrower participating in the plan will save $1,000 a month, he says.
Republicans opposed the plan, saying it was beyond the president’s authority. Senator Bill Cassidy, the top Republican on the Committee on Health, Education, Labor and Pensions, called it “profoundly unfair” to the 87% of Americans who don’t have student loans.
The Congressional Budget Office previously estimated that the plan would cost $230 billion over the next decade, even more after the forgiveness plan was cancelled. According to researchers from the University of Pennsylvania, the cost of the project reaches 361 billion dollars.
Some opponents, encouraged by the Supreme Court’s decision to overturn, say it’s only a matter of time before the repayment plan also runs into legal trouble.
Here’s what you need to know about the SAVE plan:
WHAT IS THE INCOME-DETERMINED REPAYMENT PLAN?
The US Department of Education offers several federal student loan repayment plans. Under the standard plan, borrowers are charged a fixed monthly amount, which guarantees that all of their debt will be repaid in 10 years. But if borrowers have difficulty paying that amount, they can enroll in one of four plans that offer lower monthly payments depending on income and family size. These are known as income-based repayment plans.
Income-driven options have been offered for years and typically cap monthly payments at 10% of the borrower’s discretionary income. If the borrower’s earnings are low enough, his account is reduced to $0. And after 20 or 25 years, any remaining debt is erased.
WHAT IS THE BIDEN PLAN DIFFERENT?
As part of his debt relief plan announced last year, Biden said his Department of Education would develop a new income-focused debt repayment plan that would further lower payments. It became known as the SAVE plan and is generally designed to replace existing income-focused plans.
Borrowers will be able to apply later this summer, but some changes will be phased in.
Immediately, more people will be eligible for $0 payments. The new plan will not require borrowers to make payments if they earn less than 225% of the federal poverty line of $32,800 a year per person. The threshold for current plans, in contrast, is 150% of the poverty line, or $22,000 per person per year.
Another immediate change is to keep interest from skyrocketing.
As long as borrowers make their monthly payments, their total balance will not increase. Once they cover their adjusted monthly payment – even if it’s $0 – any remaining interest will be waived.
Other important changes will come into effect in July 2024.
In particular, student loan repayments will be capped at 5% of discretionary income, up from 10% now. Those with graduate and student loans will pay between 5% and 10%, depending on their initial loan balance. For millions of Americans, monthly payments could be halved.
Next July will also bring a faster path to loan forgiveness. From now on, borrowers with an initial balance of $12,000 or less will cancel the balance of their loans after 10 years of payments. For every $1,000 borrowed beyond that, cancellation will occur after an additional year of payments.
For example, a borrower with an initial balance of $14,000 will repay all remaining debt in 12 years. Payments made before 2024 will count toward forgiveness.
HOW TO APPLY?
The Department of Education says it will notify borrowers when the new application process begins this summer. Those enrolled in an existing plan known as REPAYE will be automatically moved to the SAVE plan. Borrowers will also be able to register by contacting their lenders directly.
It will be available to all borrowers participating in the direct lending program who have a good credit record.
WHAT ARE THE PLUSES AND MINUSES?
Supporters say the Biden plan will simplify repayment options and offer relief to millions of borrowers. The Biden administration argues that rising student debt is putting college out of reach for too many Americans and holding back borrowers financially.
Opponents call it an unfair perk for those who don’t need it, arguing that it places a heavy burden on taxpayers who have already paid off student loans or haven’t gone to college. Some fear this will give colleges an incentive to raise tuition fees, as they know many students will have their loans canceled later.
Voices from across the political spectrum say this is tantamount to a form of free college. Biden campaigned on the promise of making community colleges free, but failed to win congressional support. Critics say the new plan is an attempt to do something similar without congressional approval.
IS IT LEGAL?
It depends who you ask, but this issue has not been considered in federal court.
Instead of creating a new payment plan from scratch, the Biden administration proposed making changes to the existing plan. He cemented those changes by going through a concerted rule-making process that allows the Department of Education to develop federal rules without the involvement of Congress.
This is a process commonly used by administrations of both political parties. But critics wonder if the new plan goes further than the law allows.
In February, more than 60 Republican lawmakers called on Education Secretary Miguel Cardona to withdraw the plan, calling it “reckless, financially irresponsible and clearly illegal.”
Supporters argue that the Obama administration similarly used its authority to create a repayment plan that was more generous than any other at the time.
The Biden administration formally finalized the rule this month. Conservatives say it’s vulnerable to legal action, and some say it’s just a matter of finding a plaintiff with the legal right – or capacity – to sue.
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