Following the recent U.S. Supreme Court decision to overturn the plan for student loan forgiveness, the Biden administration has unveiled new measures aimed at providing relief to federal borrowers.
Time-Sensitive Measures
While not all of the initiatives will be available immediately when student loan payments resume this fall, experts suggest that the most ambitious one—a renewed attempt at loan forgiveness—may never materialize.
Student loan payments were halted in March 2020 due to the pandemic and are scheduled to resume this October, regardless of the Supreme Court ruling.
Three Proposed Initiatives
Here is an overview of the three new initiatives put forward by the administration:
1. Twelve-Month Grace Period
The Education Department has introduced a twelve-month “on-ramp” for loan repayment, which will run from October 1, 2023, to September 30, 2024. During this period, borrowers who miss monthly payments will not be penalized with delinquency reports, credit bureau notifications, default status, or debt collection agency referrals.
Experts advise that borrowers who have the means to make payments should resume doing so. However, this grace period aims to protect those who are unable to pay immediately from any damage to their credit.
According to a recent report by the Consumer Financial Protection Bureau, approximately 20% of student loan borrowers exhibit risk factors that may pose challenges when regular payments resume.
New Income-Driven Repayment Plan
The Biden administration has introduced the SAVE plan, an improved version of the existing REPAYE plan, designed to assist student borrowers with a Direct Loan in good standing. This new plan takes into account the borrower’s income and family size to determine their monthly payment. Compared to previous plans, the SAVE plan offers a higher level of income protection, ensuring borrowers have more financial flexibility.
Commencing this summer, individuals earning $32,800 or less per year (approximately $15 per hour) will have a monthly payment of $0. Even if you earn more than this threshold, you will still save at least $1,000 annually compared to other income-driven repayment plans.
If you are already enrolled in the REPAYE plan, there is no need to take any action as this benefit will be automatically applied. For new borrowers, enrolling in REPAYE will also guarantee automatic enrollment in the SAVE plan once it becomes available.
To prevent loan balances from growing when regular payments are made, the government will forgive any excess unpaid interest. This essential feature helps eliminate negative amortization commonly experienced under the current income-driven repayment structure when monthly payments are insufficient to cover the loan’s full interest.
Furthermore, starting from July next year, the SAVE plan will introduce additional changes. One notable provision is the reduction of payments for undergraduate loans. For more information about the SAVE plan and its benefits, please refer to this link.
New Forgiveness Plan Takes Shape
The Biden administration is launching a fresh initiative for student loan forgiveness, taking a different approach to the previous plan. The administration had previously argued that the HEROES Act, which allows the education secretary to modify federal student financial assistance programs during times of war or national emergencies, justified the need for forgiveness due to the pandemic. However, the Supreme Court rejected this argument.
Unlike the previous plan, which was implemented under emergency measures, this new initiative will undergo a lengthier process of executive rule-making. This process includes periods for public comments and meetings with stakeholders. Peter Granville, a fellow at The Century Foundation, acknowledges that this delay may cause frustration for borrowers awaiting resolution. He advises borrowers not to postpone loan payments based on the expectation of forgiveness.