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Supreme Court To Hear Student Loan Forgiveness Challenges Next Month: What To Know About Their Impact

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Not too long ago, the idea of wiping out student debt seemed, to many, like an impossible dream. When President Biden announced a forgiveness program, it appeared that it finally came true — though some criticized it for falling short of total student loan forgiveness.

Unfortunately for eligible federal student loan borrowers, lawsuits quickly popped up that questioned the legality of the new forgiveness program. Two challenges are slated to be heard by the U.S. Supreme Court on Feb. 28.

Here’s what you should know.

4 things to know about the impact of the upcoming student loan forgiveness challenges

No. 1: Forgiveness could have a sizable impact — both good and bad

The forgiveness program would provide up to $10,000 or up to $20,000 in federal student loan forgiveness to borrowers who met income requirements. According to estimates, it would forgive about $430 billion of the existing $1.6 trillion in federal student loan debt.

“The economic effects of mass student loan forgiveness are hard to predict, but the most common expectation is that the wealth freed up by canceling so many loans would boost consumer spending, while also potentially fueling inflation,” says Michael Kitchen, LendingTree student loan expert. “Generally, those in favor of the program have highlighted the possible upsides to the economy, while those against it have focused on the risks.”

No. 2: Chances of passing appear to be slim

The Biden administration filed a brief to the Supreme Court on Jan. 4, arguing that the student loan forgiveness plan aligns with the 2003 Higher Education Relief Opportunities for Students (HEROES) Act. The brief states that this law — which has already been used to provide emergency student loan relief during the pandemic — gives the Department of Education broad powers to adjust student debt balances.

But those who oppose the program say it infringes on Congress’ ability to regulate student loans, and that it would unfairly affect a state-run student loan servicer involved in one of the suits, Kitchen says.

“We may know more when the court hears arguments next month, but the program’s chances look slim at this point,” he says. “A number of respected legal observers, including student loan expert Mark Kantrowitz and Harvard constitutional law professor Laurence Tribe, see the justices as more likely to declare the forgiveness plan invalid, given the current conservative majority.”

No. 3: If forgiveness fails, there are still options

It can be disheartening to have a potential financial break dangled in front of you, only to see it pulled away. But that doesn’t mean you’re stuck without options if you have federal student debt.

“If hopes for student loan forgiveness are dashed, borrowers can at least take comfort in some of the other programs that help with repayment or provide eventual cancellation of your debt,” Kitchen says.

For example, those who work for a nonprofit or government agency could seek Public Service Loan Forgiveness (PSLF), which can discharge all remaining student debt after 10 years of qualified repayments. (The Education Department relaxed some of the requirements for this program, though the biggest iteration — the limited PSLF waiver — ended in October 2022.)

Likewise, federal student loan borrowers could qualify for income-driven repayment plans, which can lower monthly payments to a more affordable percentage of their disposable income (capped at 10% to 15%), and then forgive the remaining balance after 10 to 25 years.

No. 4: There may be another backup plan if forgiveness fails

The Biden administration has proposed regulations that could provide further relief if forgiveness falls flat. The Education Department is calling this a student loan “safety net.” It would cut borrowers’ payments in half (or by two-thirds, depending on the plan), capping them at 5% of their income — though it can go up to 10% for those with graduate loans. Payments would also only be required for those who earn roughly $30,600 a year or more.

This new plan would also wipe out remaining federal student loan debt after 10 years for those who took out $12,000 or less. A year of repayment would be added for every $1,000 over that threshold. For example, those with $20,000 in federal student loans would see their balances wiped after 18 years. (Those with larger balances could have longer repayment terms than with the existing repayment plans.)

The proposal is open for public comment until Feb. 10. But it could provide some much-needed relief if approved.

 

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