Biden Cancels 804,000 Borrowers’ Debts in Wake of Supreme Court’s Ruling

The Biden administration’s Department of Education has announced plans to discharge 804,000 borrowers’ debts. Borrowers are expected to receive these notices within the next few weeks.

Under this updated plan, borrowers will be eligible for forgiveness of their student loans if they received Direct Loans or Federal Family Education Loans and have made qualifying monthly payments for 20 to 25 years. “Qualifying payments” under the proposal can mean many things: (1) repayment, (2) forbearance and spent more than 36 cumulative months in forbearance, (3) deferment before 2013, (4) economic hardship or military deferment on or after January 1, 2013, and (5) any time period the borrower spent 12 or more months in forbearance. Also, if the borrower underwent any month under the circumstances described above before consolidating a loan, this time will also count towards forgiveness.

These developments follow the earlier $400 billion student loan cancelation plan being invalidated by the Supreme Court’s decision in Biden v. Nebraska. The Biden administration’s Department of Education has also introduced the Saving on Valuable Education (SAVE) income-driven repayment plan, replacing the Revised Pay As You Earn plan. The SAVE plan ties loan payments to discretionary income, which for millions of borrowers would decrease their payments or eliminate them altogether. The Penn Wharton Budget Model estimated the cost of the SAVE plan at $67 billion over the next ten years.

The Department of Education is also creating a committee to “modif[y], waive[], or compromise Federal student loans,” claiming authority under section 432(a) of the Higher Education Act. Section 432(a) says the Secretary of the Department of Education can regulate and enforce student loans arising from the Federal Family Education Loan Program. Whether this grant of power extends to what they are doing here or to other loan programs may be subject to further litigation.

As we previously noted, these estimates are relative to the government's projection of the costs of student loans, which uses a faulty methodology that does not fully account for the risk of default. For years, the Department of Education has projected that the Direct Loan program will save money. An analysis of student loan programs by the Congressional Budget Office using a market-based fair-value accounting method, as well as a new review by the Government Accountability Office, shows that this simply is not true.

These changes also do not address the underlying fundamentals driving up the cost of education and encouraging heavy borrowing by students. If the President can now determine that some people simply do not have to pay back all or a portion of their loans, this may threaten program integrity and drive up future costs that will be borne by all taxpayers.