How does the Supreme Court's decision on student loan forgiveness affect you and your finances? Email senior writer Alicia Adamczyk for a future article.
In a blow to some 40 million borrowers with federal student loans, the U.S. Supreme Court blocked President Joe Biden's widespread student loan forgiveness plan in a 6-3 decision released Friday.
The plan, which would have forgiven up to $20,000 in federal student loan debt for tens of millions of borrowers and cost an estimated $400 billion, has been controversial since it was announced by the president last August. Multiple legal challenges were brought against it almost immediately, with two making their way to the nation's highest court.
In the first case, Biden v. Nebraska, six Republican state attorneys general argued the Biden administration does not have the authority to forgive the debt without Congressional approval. In the second case, Department of Education v. Brown, two student loan borrowers who do not qualify for $20,000 in relief sued to block the program.
The Biden administration, using authority from a post 9/11 law known as the HEROES Act, argued forgiveness is necessary so that borrowers do not face adverse economic impacts from the COVID-19 pandemic. The HEROES Act allows the U.S. Secretary of Education to "waive or modify any statutory or regulatory provision applicable to the student financial assistance programs...as the Secretary deems necessary in connection with a war or other military operation or national emergency."
The conservative-majority court ruled unanimously that the borrowers in Department of Education v. Brown had no standing to sue, but agreed with the states that Biden does not have the authority to forgive the debt. The liberal Justices Elena Kagan, Ketanji Brown Jackson, and Sonia Sotomayor dissented, while the majority opinion was written by Chief Justice John Roberts.
"The HEROES Act allows the Secretary to 'waive or modify' existing statutory or regulatory provisions applicable to financial assistance programs under the Education Act, but does not allow the Secretary to rewrite that statute to the extent of canceling $430 billion of student loan principal," the opinion reads.
The decision comes a day after the court also voted to end consideration of race in college admissions.
Justice Kagan was scathing in her dissent, writing that the court should not have even taken the case, as the six states suing did not lose any revenue because of the program and thus had no standing.
"No proper party is before the court," Kagan writes. "A court acting like a court would have said as much and stopped."
The decision could impact both borrowers and the economy
Not only is the decision a setback for borrowers who began to plan their finances around forgiveness, it is also a potentially massive blow to the U.S. economy at an already precarious time, economists have said. Tens of millions of people will have to start paying hundreds, if not thousands, of dollars each month in student loan payments again, when the Covid-19-induced federal payment pause ends in a few months' time. The loan forgiveness could have helped smooth the transition back into repayment, advocates have said.
"If payments are to resume without cancelation, we can expect a tremendous increase in defaults and forbearance," says Persis Yu, the deputy executive director of the Student Borrower Protection Center. "There absolutely must be a plan to avoid the economic devastation."
Members of the NAACP and other advocacy groups are calling on the Biden administration to do what it can to "make student debt cancellation a reality." The president said he will "announce new actions to protect student loan borrowers" sometime on Friday.
"The Supreme Court has issued a ruling on whether we can move forward with our student debt relief program. We are reviewing the Court’s decision to determine next steps," reads an update on the Department of Education's website.
Conservative politicians celebrated the ruling, with House Speaker Kevin McCarthy, R-Calif., calling the "student loan giveaway" unlawful. "The 87% of Americans without student loans are no longer forced to pay for the 13% who do," McCarthy tweeted.
What borrowers should prepare for now
Student loan forgiveness was a key issue in the 2020 election, with Biden pledging to relieve borrowers, many of whom struggle to make their payments each month. When he announced his plan last year, Biden estimated it would completely eliminate the student loan debt of about 20 million people.
It's possible Biden's administration may take another stab at forgiving some student loans, says Betsy Mayotte, president of The Institute of Student Loan Advisors. But for now, borrowers should prepare for their payments to restart in October, when the federal payment pause officially ends after three and a half years.
"Make sure you know who your servicer is. Borrowers should also get an idea of what their payments will be, and if they can't afford it look for lower payment options and apply for those now," Mayotte says. "Read all the things. We’re all guilty of maybe not opening our mail right away or letting emails go by. Now is not the time to do that."
Those borrowers who requested a refund of student loan payments after the cancelation plan was announced should also be prepared to repay that debt, she says.
"I’m seeing some borrowers that are unaware that if the debt relief doesn't go through, they will owe that back," she says. "Their balance will have increased by the amount they got the refund for. Hopefully they banked that refund."
Mayotte adds that borrowers should familiarize themselves with the Biden administration's new proposed income-driven repayment plan. Though it has not been implemented yet (and the details could change), it could lead to substantially smaller monthly payments for many borrowers, and a quicker road to loan forgiveness.
Because it is ongoing, Mayotte considers the new IDR plan potentially more transformative than the one-time forgiveness plan.
"It won’t result in immediate forgiveness, but it could result in less money out-of-pocket for a lot of borrowers," she says of the new IDR plan. "This administration has done more for vulnerable student loan borrowers in a very short time than any other administration in memory."
But Michael Brickman, adjunct fellow at the conservative American Enterprise Institute, tells Fortune that the court's decision on the loan forgiveness program "moves the fight to IDR," since the new repayment plan would forgive more loans. It's possible opponents could feel emboldened to go after those changes now.
"The IDR fight becomes more important from just the dollar and cents perspective," Brickman says. "The actual cost of that program will increase substantially."
This is a developing story. Please check back for more updates.
