Biden unveils plan B after Supreme Court rejects pardon

Just hours after the Supreme Court rejected the president's student loan forgiveness plan, the White House came back on Friday with several ways to help borrowers.

The Biden administration is seeking debt relief under the Higher Education Act of 1965 and has initiated that regulatory process. In addition, the Department of Education is creating a temporary 12-month on-ramp repayment program that will remove the risk of default if borrowers miss their payments once they resume in October. Third, the government finalized a new earnings-related repayment plan, which it described as “the most affordable repayment plan in history.”

The goal is to ease the financial burden on many student loan borrowers and comes in direct response to Friday's Supreme Court decision.

“I believe the Supreme Court's decision to abolish student debt relief was a mistake, it was wrong,” President Joe Biden said in a news conference Friday afternoon.

“It will take longer, but it is the best way that remains,” he added, referring to the government's steps to ease debt. “We won't waste any time with this.”

U.S. President Joe Biden delivers remarks on the Student Loan Forgiveness Program in an auditorium on the White House campus on October 17, 2022 in Washington, United States. REUTERS/Leah Millis

debt relief

The Secretary of Education on Friday initiated a rulemaking process to open “an alternative path to debt relief for as many working and middle-class borrowers as possible” under the powers of the Higher Education Act, according to the White House data sheet.

The Department of Education issued a notice on Friday announcing a virtual public hearing for July 18 and asking for written comments from stakeholders. After the hearing, the department will finalize the issues to be discussed and hold negotiation sessions to set rules in the fall.

The White House fact sheet was not clear on whether the Biden administration is pursuing the same forgiveness plan parameters that the court rejected. As part of this plan, the federal government planned to waive $10,000 for individuals earning less than $125,000 and households earning less than $250,000. An additional $10,000 in forgiveness will go to those who have received need-based Pell grants.

The White House press office did not immediately respond to an email clarifying the debt relief parameters it was seeking under the Higher Education Act.

Repayment schedule on the ramp

The administration also unveiled a plan to help borrowers resume suspended payments in October. For 12 months, borrowers will not be penalized for late, missed or partial payments. Borrowers do not need to take any action to qualify for the program.

Payments are still due and interest continues to accrue during the 12 months, but interest is not capitalized at the end of the on-ramp period. Borrowers who miss payments are not reported to credit bureaus, are not considered in default, and are not referred to collection agencies for those payments.

The administration encouraged borrowers who can afford to pay their installments to do so.

New income-related repayment plan

Jordan Crowe, a supporter of student loan debt relief, gathers before the Supreme Court as judges are scheduled to hear hearings again in two cases involving President Joe Biden's attempt to scrap his plan to scrap billions of dollars in student loans to enact debt in Washington, U.S., February 28, 2023. REUTERS/Nathan Howard

Jordan Crowe, a supporter of student loan debt relief, demonstrates in front of the Supreme Court in February. (REUTERS/Nathan Howard)

Most recently, the administration completed the Saving on a Valuable Education (SAVE) plan. The White House said this new earnings-related repayment plan will halve borrowers' monthly payments, allow many borrowers to make $0 monthly payments and prevent balances from accumulating due to unpaid interest.

The plan makes loan payments more affordable in the following ways:

  • The maximum amount that borrowers must pay on their student loans is 5% of their discretionary income, instead of 10%.

  • No borrower earning less than 225% of the state poverty line is required to make a monthly payment.

  • Loan balances are forgiven after 10 years of payments—instead of 20 years—if the original loan balance was $12,000 or less.

  • Borrowers are not charged any outstanding monthly interest, so their balance doesn't increase when they make their payments — even if that monthly payment is $0 because their income is low.

Repaying student borrowers will be able to enroll later this summer before monthly payments resume. Borrowers who enroll or are already enrolled in the Revised Pay as You Earn (REPAYE) plan will be automatically enrolled in the new plan.

“President Biden, Vice President Harris and I will never stop fighting for borrowers,” Secretary of Education Miguel Cardona said in a press statement, “so we are using every tool available to give them the relief they need.”

Janna Herron is the personal finance editor at Yahoo Finance. Follow her on Twitter @JannaHerron.

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