The city of Washington, D.C., as reported by the Associated Press ( The term used by the Biden administration to refer to this concept is “student loan safety net.” Critics argue that this initiative represents a covert strategy to establish tuition-free college education.
The potential for it to become the next arena in the legal dispute regarding student loan relief is evident.
Commencing this summer, many American citizens burdened with student loans will have the opportunity to partake in a novel repayment scheme that provides exceptionally favorable conditions. Interest will not accumulate as long as borrowers consistently make their scheduled payments. The monthly costs of millions of individuals will be reduced to $0.
The outstanding debt will be canceled within a maximum period of 10 years.
The initiative, referred to as the SAVE Plan, was introduced last year but has largely been eclipsed by President Joe Biden’s proposal for widespread student loan forgiveness. However, following the Supreme Court’s ruling against Biden’s forgiveness plan, the repayment option has become the primary focus.
In light of the recent ruling, President Biden has put forth an alternative strategy for debt cancellation and has also redirected focus towards a lesser-known initiative, which he refers to as “the most cost-effective repayment plan to date.” According to the speaker, the average borrower who enrolls in the plan can expect to save $1,000 per month.
The Republican party opposes the plan, arguing that it exceeds the president’s jurisdiction. Senator Bill Cassidy, the esteemed Republican member who holds the highest position on the Health, Education, Labor, and Pensions Committee, expressed his strong disapproval, characterizing it as “profoundly unjust” towards the vast majority of Americans, approximately 87%, who are not burdened by the financial obligations of student loans.
According to the Congressional Budget Office’s previous estimation, the plan was projected to incur a cost of $230 billion over the next decade. However, it is essential to note that this cost would likely be even higher following the recent dismissal of the forgiveness plan. According to estimates from researchers at the University of Pennsylvania, the projected price is potentially as high as $361 billion.
Some opponents, inspired by the Supreme Court’s ruling on cancellation, assert that it is only a matter of time before the repayment plan’s legality is also questioned.
The following information provides an overview of the SAVE Plan:
INCOME-BASED REPAYMENT PLANS ARE FOR WHOM?
The United States Department of Education provides a range of repayment options for federal student loans. By the standard plan, borrowers will incur a predetermined fixed monthly charge, which guarantees the complete repayment of their debt within a 10-year timeframe.
If borrowers encounter challenges in meeting the specified payment amount, they can participate in any of the four available plans. These plans are designed to provide reduced monthly payments, which are determined by the borrower’s income and family size. These repayment plans are commonly referred to as income-driven repayment plans.
Income-driven options have been available for an extended period and typically impose a maximum limit on monthly payments, restricting them to 10% of a borrower’s discretionary income. If a borrower’s earnings fall below a certain threshold, their bill is adjusted to $0. After a period of 20 to 25 years, any outstanding debt is automatically eliminated.
What are the critical differences in Biden’s plan compared to other programs?
As a component of the debt relief plan unveiled last year, President Biden announced establishing of a novel income-driven repayment plan by the Education Department. This plan aims to reduce the burden of payments for borrowers further. The initiative was officially named the SAVE Plan, and its primary objective is to substitute for current income-driven plans.
The application process for borrowers will become available in the upcoming summer, with specific changes being implemented gradually.
Immediately, more individuals will meet the criteria for receiving payments of $0. The revised plan eliminates the need for borrowers to make payments if their income falls below 225% of the federal poverty line, equivalent to $32,800 annually for an individual. In contrast, the current plans have a cutoff of 150% of the poverty line, equal to $22,000 annually for an individual.
An additional modification is being implemented to mitigate the compounding of interest.
The overall balance of borrowers will not increase as long as they consistently make their monthly payments. Any remaining interest will be waived after the user covers their adjusted monthly income, including cases where the payment amount is $0.
Significant modifications are scheduled to be implemented in July 2024.
A significant change to be highlighted is the reduction of undergraduate loan payments to a maximum of 5% of discretionary income, as opposed to the current rate of 10%. Individuals who possess graduate and undergraduate loans will be subject to a variable interest rate ranging from 5% to 10%, which is contingent upon the initial balance of their loan. Monthly payments for millions of Americans have the potential to be reduced by 50%.
In the upcoming month of July, there will be an expedited process for loan forgiveness. Commencing from that point onwards, borrowers whose initial balances do not exceed $12,000 will be eligible to have the remaining amount of their loans canceled upon completion of 10 years of consistent payments. The cancellation will occur after an additional year of prices for every $1,000 borrowed beyond the initial amount.
As an illustration, in the case of a borrower with an initial balance of $14,000, the outstanding debt would be eliminated after 12 years. Payments that are made before the year 2024 will be considered eligible for forgiveness.
HOW DO I APPLY?
The Education Department has announced its intention to inform borrowers about the upcoming launch of the new application process during the summer. Individuals who are currently enrolled in the REPAYE plan will undergo an automatic transition to the SAVE plan. Borrowers will have the option to register by directly contacting their loan servicers.
The availability of this service extends to all borrowers participating in the Direct Loan Program, provided they maintain a positive standing with their loans.
WHAT ARE THE PROS AND CONS?
Proponents argue that Biden’s plan aims to streamline repayment alternatives and provide assistance to a significant number of borrowers. The Biden administration has argued that the substantial increase in student debt is causing many Americans to be unable to afford a college education, thereby impeding their financial progress.
Critics argue that the benefit above is perceived as inequitable for individuals who do not require it, as it imposes a significant financial burden on taxpayers who have already settled their student loans or did not pursue higher education. Specific individuals are concerned about the potential for colleges to increase tuition fees due to their awareness that numerous students will have their loans forgiven in the future.
Various political perspectives have argued that this can be a tuition-free college education. During his campaign, President Biden committed to establishing tuition-free community colleges. However, this proposal did not garner sufficient support from Congress. According to critics, the new plan is being perceived as an endeavor to achieve a comparable outcome without obtaining approval from Congress.
IS IT LEGAL?
The answer to this question varies depending on the perspective of the individual being asked. However, it is essential to note that no federal court has addressed this issue.
Instead of developing a payment plan de novo, the Biden administration has modified an existing plan. The changes above were solidified through a negotiated rulemaking process, which grants the Education Department the authority to formulate federal regulations independently from Congress.
The process above is widely employed by administrations belonging to various political parties. However, some critics raise concerns regarding the extent to which the new plan surpasses the boundaries set by the law.
In February, over 60 Republican lawmakers asked Education Secretary Miguel Cardona to withdraw the plan. They characterized the project as “reckless, fiscally irresponsible, and blatantly illegal.”
Supporters contend that the Obama administration effectively utilized its authority to establish a repayment plan that surpassed all others in generosity during that period.
Conservatives believe that the current situation is susceptible to a potential legal dispute. Additionally, some individuals argue that the critical factor is identifying a plaintiff with the necessary legal entitlement or standing to initiate a lawsuit.