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The Future of One-Time Forgiveness: The Path Forward for Student Loan Cancellation

The Supreme Court struck down the plan to forgive up to $20,000 per borrower, but the hope for debt cancellation is far from over.

Written By: Michael P. Lux, Esq.

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By a 6-3 decision, the Supreme Court seemingly ended the Biden administration’s plan to forgive up to $20,000 per borrower.

Legal scholars and borrowers will undoubtedly take issue with the decision. The court granting standing to Missouri despite MOHELA’s choice not to get involved is questionable. Congress granted the President broad authority over student debt during a national emergency, but the court still decided against the forgiveness.

It’s hard to put a positive spin on a day when the news is terrible, so I won’t try.

Instead, I think it’s worth discussing the many options available for the Biden administration to move forward on student loan forgiveness.

For starters, the Supreme Court’s ruling today opens the door for another attempt at loan cancellation. Additionally, smaller-scale programs in development and recently implemented provide new forgiveness options for borrowers.

Student Loan Forgiveness Under the Higher Education Act

During the 2020 election cycle, candidates Elizabeth Warren and Bernie Sanders claimed that as President, they could cancel federal student debt for all borrowers. Both candidates proposed plans more ambitious than the Biden plan that was just struck down.

Interestingly, these plans relied upon the authority of the Higher Education Act. A team of Harvard attorneys laid out the argument.

If this option were realistic, why didn’t the Biden administration use it? Lawyers make arguments in the alternative all the time. The Solicitor General, Biden’s top attorney at the Supreme Court, could have argued that the HEROES Act and the HEA gave the authority to forgive the debt. The plan would have been upheld as long as the Supreme Court agreed with one of the arguments.

Instead, the HEA authority wasn’t mentioned. That could have been a really smart strategy in light of today’s ruling.

Axing MOHELA and Changing the Standing Argument

There was a noteworthy student loan decision that was released at the same time as Nebraska v. Biden. In Department of Education v. Brown, the court ruled by unanimous decision that borrowers didn’t have standing to challenge the one-time forgiveness program.

Even the conservative justices on the court were careful not to fundamentally change the rules of standing. Altering the standard could open the floodgates to potential lawsuits over government programs.

In Nebraska v. Biden, the court ruled that MOHELA, as an instrumentality of the state of Missouri, had standing and that Missouri could challenge the law on its behalf.

If the Department of Education terminates its contract with MOHELA, the Missouri standing argument disappears. By carefully selecting servicers with no connection to state governments, the Department of Education could create a situation where no party has standing.

In that instance, a judicial review of a new forgiveness policy under the HEA wouldn’t face judgment on the merits. It would get thrown out for lack of standing.

Limitations on the HEA Authority to Forgive Student Loans

On paper, the HEA argument is probably weaker than the HEROES Act argument. That was clearly the opinion of the Biden Administration when they chose to move forward under the authority of the HEROES Act.

Undoubtedly, if the administration wanted another bite at the forgiveness apple, there would be more lawsuits, and it would probably make its way back to the Supreme Court.

This approach would not be a quick fix for borrowers.

However, by severing ties with MOHELA, the Biden administration could change the standing analysis and find a path forward for forgiveness.

Afternoon Update: Biden Announces Plan to Seek Forgiveness Under HEA

That was fast.

Biden has already announced plans to seek forgiveness for all under the HEA.

Sherpa Note: Rulemaking under the HEA takes time, and more litigation is inevitable.

Borrowers still need to prepare for payments to resume on September 1st as planned.

Forgiveness Options in Development

The Biden administration has been developing a new Income-Driven Repayment plan for over a year.

We’ve gotten many details on the final plan, and things look promising.

The Department of Education is proposing three massive changes to the REPAYE plan that would dramatically lower borrowers’ monthly bills. The new plan is called the SAVE plan (Saving on A Valuable Education).

  • Changing the discretionary income calculation from 150% of the federal poverty level to 225% – Without jumping into the math, it means borrowers keep a larger percentage of their income before they have to start contributing a portion toward their student loan payments.
  • Lowering the monthly payment to as low as 5% of discretionary income – Currently, borrowers pay at least 10%. This tweak cuts payments substantially.
  • Improving the REPAYE subsidy – At present, the REPAYE subsidy covers up to half of the interest that accrues each month on a borrower’s federal loans. The SAVE plan would cover as much as 100% of the borrower’s interest.

The new repayment plan would also forgive debt sooner for borrowers with smaller balances.

Digging Deeper: Based on the publicly released details, I’ve created a simple calculator to help borrowers estimate their monthly payments on the New SAVE plan.

Complete Loan Forgiveness Currently Available

Last winter, the Department of Justice released new guidelines that dramatically altered how the government handled federal student loans in bankruptcy proceedings.

Before the changes, bankruptcy petitioners with student loans had their debt discharged approximately .1% of the time.

I’m told that under the new policy, the Department of Education expects to stipulate to a student loan discharge approximately 80% of the time. If the numbers come out as planned, it would turn the tide on the cruel history of student loans in bankruptcy.

This change won’t help all borrowers who would have benefited from the one-time cancellation. However, for the borrowers struggling financially, it’s an opportunity to erase all their federal debt.

If your monthly bills match or exceed your monthly income, it could be an excellent time to find an attorney to help with your student loans.

Loan Cancellation and Management Moving Forward

Nebraska v. Biden was a heartbreaker for borrowers.

If nothing else, it means a simple, comprehensive fix to the federal student loan system isn’t happening anytime soon.

In the immediate future, we can expect smaller, less ambitious programs aimed at fixing specific student loan issues.

For borrowers, this means a more complicated system to navigate. It also means staying on top of the latest news and developments will be critical.

To help with that endeavor, I’ve created a mailing list that will go out at most once per month to update borrowers on any noteworthy student loan changes or programs.

About the Author

Student loan expert Michael Lux is a licensed attorney and the founder of The Student Loan Sherpa. He has helped borrowers navigate life with student debt since 2013.

Insight from Michael has been featured in US News & World Report, Forbes, The Wall Street Journal, and numerous other online and print publications.

Michael is available for speaking engagements and to respond to press inquiries.

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