student loan forgiveness executive order

In the long run, the moral hazard effects of the new IDR plan will be more consequential than the one-time student loan forgiveness which the Supreme Court struck down. This will encourage colleges to hike tuition and expand programs of questionable value.”

More students will find it rational to borrow from the federal government, particularly if they enroll in low-return programs. In particular, graduates of programs with a negative return on investment will get large subsidies. The Urban Institute estimates that just 22 percent of four-year college graduates and 11 percent of two-year college graduates will repay their loans in full. “The proposal slashes payments for undergraduate borrowers so much that many will repay only a fraction of what they borrowed. But the more pernicious impact of the rule is its effect on the incentive structure in higher education. The Congressional Budget Office has previously estimated that the new plan will cost taxpayers $276 billion over ten years. The portion of income exempt from payments will rise from 150% to 225% of the federal poverty line immediately, while most of the other provisions will take effect next summer. The Department also announced that it would push forward the effective date of the most costly provisions of the plan. The newest IDR plan, dubbed the “SAVE” plan, will cut that to just 5% of income above 225% of the poverty line for undergraduate borrowers, with remaining balances forgiven in as little as 10 years. The most generous current iteration of IDR sets student loan payments at 10% of a borrower’s income above 150% of the federal poverty line, with remaining balances forgiven after 20 years. In addition to the one-time IDR waiver, the Biden administration will also make income-driven plans far more generous going forward. The danger is that administration may use the on-ramp as a substitute for the payment pause, to be extended by the Education Department at will in order to mollify borrowers angry that loan cancellation did not go forward. That suggests a political motivation for the sudden quadrupling of the on-ramp period. The 12-month on-ramp, however, was announced only after the Supreme Court handed down its ruling nullifying the loan cancellation plan. For the first 12 months after payments resume, interest will accumulate and payments will be due, but borrowers who miss payments will not enter default, nor have their credit reports impacted.Ī shorter transition period makes sense the Education Department had originally planned for a 90-day “grace period” for missed payments.

The Biden administration will use this as justification to enact a 12-month “on-ramp” for borrowers returning to repayment. Some have never paid at all, and millions have new loan servicers and thus new points of contact in the student loan system. The return to repayment is bound to be tricky, as most borrowers have not made a single payment on their loans in over three years. Theoretically, that should bring an end to the pause, which costs taxpayers $60 billion per year. Finally, as part of the budget deal that Congress and the administration agreed to in June, the Education Department will be required to resume loan payments in September. While Congress authorized an initial six-month pause on payments in response to the Covid-19 pandemic, the Trump and Biden administrations extended the pause several times through executive action. Student loan payments have been paused since March 2020, with no interest accumulating. The result will be a significant uptick in loan cancellation over the coming years as more borrowers move across the threshold. Millions of other borrowers will move several years closer to the 20- or 25-year threshold, even if they have not crossed it yet.

But that $39 billion figure is an underestimate of how much will be forgiven through this policy. The result is that hundreds of thousands of borrowers who were several years short of the 20- or 25-year mark will automatically be moved across it, resulting in $39 billion of immediate loan cancellation. Borrowers will even be allowed to count certain periods in which they were not making payments at all. The waiver, however, will allow borrowers to count months in which they made payments in a non-IDR plan towards that 20- or 25-year quota.

Normally, borrowers enrolled in an income-driven repayment plan must make 20 or 25 years’ worth of qualifying payments in order to receive loan cancellation. This is the result of the so-called “ one-time IDR waiver” announced last April. On Friday, the Education Department announced that 804,000 borrowers would receive loan cancellation totaling $39 billion.

Student loan forgiveness executive order