Introduction
It is estimated that about 20% of adults in the United States have student loan debt and that about 93% of all student loan debt is federal.[1] The Covid-19 pandemic paused a variety of financial obligations: from mortgage forbearances to temporary moratoriums on evictions for non-payment of rent, to the interest-free student loan freeze; most, if not all of those obligations have slowly resumed over the last 3 plus years. Now, it seems, student loan repayment will resume in the near future, albeit with some possible changes.
The Supreme Court’s Decision
The Supreme Court disallowed the Biden student loan forgiveness plan. This means that any widespread student debt forgiveness will require an act of Congress. Following the Supreme Court’s decision, the Biden administration announced a 12-month “ramp up” period. To help borrowers ease into repayment, beginning on October 1, 2023, borrowers will find that late and missed payments will not be reported to credit bureaus, considered in default, or sent to collections.[2] However, interest will continue to accrue during this period. Those with the ability to make payments should do so during this period.
Interest Reform
One possible change relates to interest; specifically, Biden is working to limit capitalization events when borrowers enter repayment, exit forbearance, or leaves most income driven repayment plans. Capitalization may occur when a borrower does not pay interest on their loan as it accrues. The accrued interest is added (capitalized) into the balance of the loan meaning borrowers will pay more over the life of the loan. It is important to note that interest on loans is not being eliminated, but that there should be fewer events that allow a lender to capitalize interest.
Other regulations set to kick in make it easier to get loan forgiveness or expand forgiveness, which can be read about here.[3]
Income-Driven Repayment Reform There are also possible changes coming to income-driven repayment (IDR) plans. You can apply for an IDR plan when you are struggling to make monthly payments, or if the monthly payments are significantly higher than your monthly income. There are four types of IDR plans: Income Based (IBR), Pay As You Earn (PAYE), Revised Pay As Your Earn (REPAYE), and Income-Contingent (ICR). These plans allow your monthly payment to be based on your discretionary income and take 20-25 years to pay off. More information on each IDR can be found here.[1] The Biden administration is working to create a new IDRP with the goal of making monthly payments more affordable to borrowers and may include such terms as an interest accrual waiver.
Here at the Law Offices of Lee M. Perlman we are committed to keeping you abreast of the latest developments pertaining to federal student loans and their borrowers. If you, or someone you know, is experiencing financial distress we would encourage you to consult with our experienced attorneys; our consultations are free and we pride ourselves on achieving positive outcomes for our clients.
[1] https://educationdata.org/student-loan-debt-statistics
[2] https://www.cnn.com/2023/06/30/politics/school-loan-payments-due-october/index.html
[3] https://www.forbes.com/sites/adamminsky/2022/10/31/sweeping-new-rules-will-curtail-student-loan-interest-and-expand-loan-forgiveness-programs/?sh=76b44aa22069
[4] https://studentaid.gov/articles/idr-plan-could-save-money/