The conservative majority of the U.S. Supreme Court today struck down President Joe Biden’s controversial student loan forgiveness program in a 6-3 decision in the case of Biden v. Nebraska (with liberal justices Kagan, Sotomayor and Jackson dissenting) that means the plan will not be able to wipe roughly $430 billion of federal student loan debt for close to 40 million Americans.
The Biden Administration had argued it had the right to cancel the loan debt as part of its emergency response to the COVID-19 pandemic and under a 2003 law called the HEROES Act, which was passed during the Iraq War.
Before the court can reach the merits of the cases, it had to find at least one set of challengers has the legal right to sue, known as “standing.”
While the court unanimously found there was no standing to sue in the other case: Dept. of Education v. Brown—it found the state of Missouri does have standing as loan servicer MOHELA, a nonprofit government corporation created by the state to participate in the student loan market, would lose an estimated $44 million a year in fees as a result of the loan forgiveness program. The court equated that harm to MOHELA in the performance of its public function is necessarily a direct injury to Missouri itself—establishing standing to sue.
Once that was established, the court’s conservatives said that only Congress could authorize such a large-scale cancellation of government-provided loans, and it had not done so.
“The authority to ‘modify’ statutes and regulations allows the Secretary [of Education] to make modest adjustments and additions to existing regulations, not transform them,” Chief Justice John Roberts wrote for the majority. The “modifications” by the Department of Education “created a novel and fundamentally different loan forgiveness program” that “expanded forgiveness to nearly every borrower in the country,” Roberts’ opinion said.
In dissent, Justice Elena Kagan wrote: “In every respect, the court today exceeds its proper, limited role in our nation’s governance … The result here is that the court substitutes itself for Congress and the executive branch in making national policy about student-loan forgiveness.”
Decision nixes loan forgiveness
As a result of today’s ruling, the Biden Administration will not be allowed to proceed with its partisan plan, first announced in August 2022, to deliver on a campaign promise by wiping roughly $430 billion of federal student loan debt off the books. It would have forgiven $10,000 for borrowers who earn less than $125,000 a year or families earning less than $250,000, and $20,000 for borrowers with Pell Grants. Roughly 25 million borrowers applied for the program last fall, and the Department of Education approved about 16 million for relief before court orders put it on hold last November.
It was estimated that the Biden plan, if allowed, would have completely erased the student loan debt of about 20 million Americans while lowering the balances of close to another 20 million who qualified for the struck-down relief.
“While we strongly disagree with the court, we prepared for this scenario. The president will have more to say today,” a White House official who spoke on the condition of anonymity told The Hill. “The president will make clear he’s not done fighting yet and will announce new actions to protect student loan borrowers.”
“This decision makes near certain that the 42 million federal student loan borrowers who have been in a 3-year forbearance period since the beginning of the Covid-19 pandemic will usher back into repayment this fall without this much-anticipated relief measure,” said Laurel Taylor, CEO and Founder of student debt solutions provider Candidly. “The resumption of payments could have potentially devastating consequences for the morale of student loan borrowers and for their wallets. Federal student loan borrowers have not had to make a payment on a student loan in over 3 years, and have long ago reallocated their monthly payment—an average of $393—to groceries, rent, and living expenses. In addition, there are millions of recent college graduates who have never had to make a payment on a student loan. Over 90% of student loan borrowers say they are not ready for payments to resume.”
As “devastating as this outcome is for borrowers,” Taylor continued, “the good news is that there are powerful forgiveness programs already available, including income-driven repayment plans and Public Service Loan Forgiveness.”
She added that Candidly recommends borrowers look into other ways to lessen their student loan burden, like enrolling in an income-driven repayment plan, or exploring Public Service Loan Forgiveness.
“The SECURE Act 2.0 has come at the perfect time to assist borrowers who are transitioning back into repayment by allowing them to receive a retirement match on their monthly student loan payments,” Taylor said. “This will facilitate borrowers making simultaneous progress on paying down their debt and building retirement savings.”
This much-anticipated provision of SECURE 2.0 will begin in 2024, allowing employers to make matching contributions to retirement plans including 401(k), 403(b), 457(b) government plans, and SIMPLE-IRA plans based on an employee’s qualified student loan payments.
This removes the difficult decision for many student loan borrowers of whether to make a bigger loan payment or contribute to their 401(k) plan to capture the employer match. In the past, this decision has resulted in many participants missing out on the company match.
Forbes Advisor reported in May that Federal student loans make up the vast majority of American education debt—about 92% of all outstanding student loans is federal debt. The federal student loan portfolio currently totals more than $1.6 trillion, owed by about 43 million borrowers. The national average balance of federal student loan borrowers is $35,210.
Many retirees also feel the pressure of student loans, as the Department of Education’s Federal Student Aid Office reports there are 2.4 million borrowers aged 62 or older that owe $98 billion in student loans.
Back in August 2022, Biden first announced details of his plan to deliver on his campaign promise to provide $10,000 in student debt cancellation for millions of Americans, and up to $20,000 for those with Pell Grants. Borrowers who earn less than $125,000 a year, or families earning less than $250,000, would have been eligible for the $10,000 loan forgiveness.
Loan default fears grow with end of payment pause
Combined with the looming end of an often-extended 42-month pause on federal student loan payments that started near the outset of the Coronavirus pandemic, today’s ruling means student loan debtors will have to begin paying back the full amounts of their loan balances beginning in October.
The recent bill passed by Congress and signed into law by President Biden to raise the debt ceiling included a provision that forces the resumption of federal student loan payments starting in October, and removes the possibility of Biden ordering yet another extension.
The Department of Education posted on its website that student loan interest will resume starting on Sept. 1, 2023, and said borrowers will receive a billing statement or other notice at least 21 days before payment is due. The notice will include the borrower’s payment amount.
Some Republican lawmakers have also expressed concerned about the Department of Education’s readiness to resume collecting student loan payments in October, accusing it of being “ill-prepared” to transition borrowers back into repayment.
Rep. Virginia Foxx (R-NC) and Sen. Bill Cassidy (R-LA), top Republicans on the House and Senate education committees, respectively, sent a letter to Education Secretary Miguel Cardona on Tuesday requesting “tangible proof” on how he plans to ensure a smooth transition.
“As the committees responsible for oversight of the Department, we need to know if the Department has exercised due diligence and done all it can to prepare the servicers to provide the best customer service to borrowers, and that borrowers have a clear understanding of what is required of them for a smooth transition to repayment.”
The letter requested that Cardona provide an in-person briefing on the plan no later than July 20, and that the Department of Education take action to counter anticipated coordinated efforts of borrowers refusing to repay their loans.
According to nonprofit public policy organization The Brookings Institution, the most concerning outcome of the end of the federal student loan payment pause—in effect since the onset of the Coronavirus pandemic in March 2020—is that borrowers who are unprepared for their payments to resume may fall into delinquency or default. This can result in wage garnishment and borrowers losing eligibility for additional financial aid.
Candidly’s Taylor told 401(k) Specialist this is a legitimate concern.
“Whenever there has been a national emergency that has put debt accounts into forbearance, the length of the forbearance period has correlated to delinquency and default rates once borrowers enter back into repayment,” Taylor said. “After 3 years, we expect that delinquency and default rates could surge to an all-time high, compounded by the fact that many borrowers may feel wronged or misled by false pretenses of forgiveness. Given the multiple extensions, typically announced just days before the end of the moratorium, borrowers may not even believe that the news is true until payments have resumed.”
The Department of Education is also concerned.
“Unless the [Education] Department is allowed to provide debt relief, we anticipate there could be an historically large increase in the amount of federal student loan delinquency and defaults as a result of the COVID-19 pandemic,” Education Department Undersecretary James Kvaal said in a November court filing asking a federal judge to stay an order that temporarily blocked Biden’s plan.
Only about half of federal student loan borrowers were in repayment in 2019 before the pandemic pause, according to an estimate by well-known higher education expert Mark Kantrowitz. About 25%—or more than 10 million people—were in delinquency or default, and the rest had applied for temporary relief for struggling borrowers, including deferments or forbearances.
Student loan debt impacts retirement savings
Carrying any student loan debt has been found to have a very detrimental effect on retirement savings. A 2018 Boston College Center for Retirement Research study found that college graduates with student debt have a startling 50% less in retirement savings by age 30 compared to college grads without student loan debt.
“Those with debt have much lower 401(k) assets by age 30 than those without debt,” the report states. “This result holds whether the loans are large or small, suggesting that the presence of the loan may be more important than the size of the payments.”
The report also said student loans appear to have no effect on participation and no significant effect on the asset accumulation of non-graduates.
There are six times as many federal student loan borrowers ages 60 and older now than there were in 2004, but their debt has increased “19-fold,” according to a report from New America, a public policy think tank. About 3.5 million Americans 60 and older carry $125 billion in student debt, the report found.
A Nov. 2022 AARP report found around 3% of families headed by someone who was 50 or older had student debt in 1989, with an average balance of $10,000. But by 2016, that figure rose to 9.6%, with an average debt of $33,000.
Biden announces alternatives, Republicans applaud court decision
In light of the Supreme Court’s ruling Friday morning, President Biden detailed the next steps in remarks delivered at the White House Friday afternoon, where he was joined by Education Secretary Miguel Cardona.
“This new path is legally sound. It’s going to take longer. And in my view, it’s the best path that remains to student debt relief to as many borrowers as possible as quickly as possible,” Biden said.
The two steps announced Friday afternoon, according to a White House Fact Sheet:
- The Secretary of Education initiated a rulemaking process aimed at opening an alternative path to debt relief for as many working and middle-class borrowers as possible, using the Secretary’s authority under the Higher Education Act.
- The Department of Education finalized the most affordable repayment plan ever created, ensuring that borrowers will be able to take advantage of this plan this summer—before loan payments are due. Many borrowers will not have to make monthly payments under this plan. Those that do will save more than $1,000 a year.
In addition, to protect the most vulnerable borrowers from the worst consequences of missed payments following the payment restart, the Department is instituting a 12-month “on-ramp” to repayment, running from October 1, 2023 to September 30, 2024, so that financially vulnerable borrowers who miss monthly payments during this period are not considered delinquent, reported to credit bureaus, placed in default, or referred to debt collection agencies.
“Today’s decision has closed one path; now we’re going to pursue another,” Biden said. “I will use every tool at our disposal to get you the student debt relief you need and reach your dreams. It’s good for the economy and good for the country and can be good for you.”
Republicans, meanwhile, hailed the Supreme Court decision while contending that Biden’s initial student loan forgiveness plan was unconstitutional and unfair.
Former Vice President and current Republican presidential candidate Mike Pence said the Biden administration’s plan was “an egregious violation of the Constitution,” adding that he was “pleased that the Court struck down the Radical Left’s effort to use the money of taxpayers who played by the rules and repaid their debts in order to cancel the debt of bankers and lawyers in New York, San Francisco, and Washington, D.C.”
In a statement to Fox News, another candidate, Sen. Tim Scott (R-SC) also applauded the ruling. “The U.S. Supreme Court was right to end the illegal and immoral effort by the Biden Administration to transfer student debt to taxpayers,” Scott said.
“The Supreme Court was right to throw out Joe Biden’s power grab,” said candidate Nikki Haley. “A president cannot just wave his hand and eliminate loans for students he favors, while leaving out all those who worked hard to pay back their loans or made other career choices.”
“Biden’s student loan bailout unfairly punished Americans who already paid off their loans, saved for college, or made a different career choice,” Republican National Committee Chairwoman Ronna McDaniel said Friday on Twitter. “Americans saw right through this desperate vote grab, and we are thankful that the Supreme Court did as well.”
EDITOR’S NOTE: This article has been further updated with the final section to report on President Biden’s comments Friday afternoon in light of the ruling, and Republican reaction to the ruling.
SEE ALSO:
• Supreme Court Still Quiet on Student Loan Forgiveness Fate
• Supreme Court Ruling on Biden’s Student Loan Forgiveness Expected by End of Week
• Debt Ceiling Deal: Student Loan Payments to Resume
• SoFi at Work Launches Student Loan Debt Repayment Service
Veteran financial services industry journalist Brian Anderson joined 401(k) Specialist as Managing Editor in January 2019. He has led editorial content for a variety of well-known properties including Insurance Forums, Life Insurance Selling, National Underwriter Life & Health, and Senior Market Advisor. He has always maintained a focus on providing readers with timely, useful information intended to help them build their business.
The Supreme Court’s decision on student debt followed the CONSTITUTION, indicating that only CONGRESS can make these financial changes. Brian Anderson starts his discussion by indicating the decision was made by the Conservative Majority. This statement implies that the decision would have differed if the Court had been more politically LEFT.
THIS WAS A CONSTITUTIONAL ISSUE, NOT A POLITICAL ONE. Hopefully, in the future, the editor-in-chief will keep his political bias in check.