On June 30, the U.S. Supreme Court struck down the Biden administration’s debt relief plan. Millions of borrowers who applied for relief must now grapple with the reality that student loan cancellation may not come.
The administration has announced various measures to soften the blow of the Court’s disappointing ruling—and some of these measures will offer a real alternative path toward debt relief. However, while the administration continues its work, the ruling still leaves the most vulnerable borrowers in the lurch. The end of the pause on repayment of federal loans is looming, and low- and very low-income student loan borrowers with large remaining balances will have limited options. In particular, many student loan borrowers of color are in a precarious position.
The Court’s ruling is a moment of reckoning for higher education—both in terms of resolving the unacceptable debt burdens of so many Americans, and in plotting a more just (and sensible) model for education financing in the future. Now is the time to take fresh stock of the risks and liabilities that student loan debt imposes on Americans.
But the ruling also provides a moment of opportunity. We must take bold stances and reaffirm the government’s commitment to provide equal access to higher education, as the law obligates. There is also now a unique possibility for bipartisan collaboration to address the underlying cause of our debt crisis: rampant and unchecked tuition increases across higher education. The risk of middle class collapse and irrevocable damage to our overburdened higher education system is too great not to take action.
Setbacks for Borrowers
The Supreme Court’s ruling is a serious setback for borrowers, especially the most vulnerable borrowers—even as the Biden administration has outlined a laudable back-up plan.
Under the debt relief plan that the Court struck down, borrowers of color would have seen their lifetime per-dollar payments cut in half, on average. Nearly one-quarter of Black borrowers would have received total forgiveness. Unfortunately, the Court’s finding that the plan was unconstitutional leaves these vulnerable borrowers with little recourse. The vast majority of those who sought access to debt relief under the Biden plan came from low-income communities in both red and blue states.
Since the ruling, the Biden administration has announced its intent to utilize its authority under the Higher Education Act of 1965 to “compromise, waive, or release any title, claim, lien, or demand” on student debt, and protect low-income and working class families. But this new plan will also have to withstand legal challenges and political pressure. To this end, the Department of Education will establish a “negotiated rulemaking” process, likely composed of stakeholders, including advocates and loan servicers, to prepare proposed regulations on debt relief for holders of federal student loans.
While these measures are helpful, any rules that result from the process will not take effect immediately. And for borrowers who don’t typically watch multiday, technical rulemaking procedures, the process may hold little (immediate) significance.
The administration has also proposed the SAVE Plan, which would replace the existing REPAYE plan, and provide benefits to borrowers such as ensuring their loan balances don’t increase from unpaid interest. Yet the SAVE Plan is also likely to face a legal challenge in the near future.
The Perilous Case of Parent PLUS
Borrowers of one type of loan are especially hard hit by the Supreme Court’s decision: Parent PLUS borrowers. More than 3.7 million families owe $104 billion in Parent PLUS loans. The Parent PLUS debt portfolio provides concrete examples of the way debt locks families in an intergenerational debt cycle. Some 33 percent of Black parents with loans for their child’s education also have loans for their own education, compared to just 20 percent for all other groups. Parent PLUS borrowers are generally older adults, many of whom sacrifice their own financial stability to support their children’s educational pursuits. The higher education debt trap is just one of many reasons Black parent borrowers are in more precarious financial circumstances than other parent borrowers.
Historically, borrowers of Parent PLUS loans have been ineligible for most federal student loan relief programs, including loan repayment options—referred to as income-driven repayment (IDR) options—that tie monthly payment obligations to income. The Department of Education extended some relief to Parent PLUS borrowers via the IDR Account Adjustment in 2022, which provided those enrolled in an IDR plan or working toward Public Service Loan Forgiveness credit for payments that would not have previously counted. Borrowers who have already made enough payments over twenty to twenty-five years will be the first to see their balances wiped out under the account adjustment, which is slated to provide $39 billion in student loan relief. But many parent borrowers are still relegated to the least-generous IDR program.
Despite the Department introducing IDR plan reforms that offer relief to struggling federal student loan borrowers, Parent PLUS loan borrowers are still generally unable to access the relief, at most being able to join a plan that caps monthly payments at 20 percent of the borrower’s income. Under the Department’s SAVE Plan, borrowers’ monthly repayment will be capped at 5 percent of their discretionary income. However, Parent PLUS borrowers are functionally excluded from the SAVE plan. Without access to IDR, these parent borrowers, who reap none of the economic benefits a college degree is intended to provide, will continue to languish in repayment for decades.
Parent PLUS borrowers would have benefited immensely under the Biden administration’s debt cancellation plan, which would have canceled up to $20,000 in student loans for qualifying borrowers, and would have improved their chances of success in repayment in the future by lowering monthly payments and resetting their default clock.
Now, Parent PLUS borrowers are back on the hook for loans that arguably never should have been made in the first place, because they were made without regard for the borrowers’ ability to repay. With the end of the debt repayment pause looming, a smooth return to repayment is especially crucial for Parent Plus borrowers. And moving forward, major reforms are needed to ensure that federal Parent PLUS loans are made available only to those parents who have the means to repay them.
The End of the Payment Pause
The student debt repayment pause is expiring this fall—a fact that borrowers knew well before the Supreme Court’s decision, but which has become all the more painful without the expected debt relief. The fear and anxiety prompted by the impending deadline are acute and harmful.
Loan servicers have begun contacting borrowers to ensure that they are prepared to resume payments after the years-long pause. These communications are important because many borrowers will enter repayment with new student loan servicers. In addition, borrowers who have graduated or withdrawn from postsecondary programs since the payment pause was enacted will be engaging with servicers for the very first time. Servicers have been fairly transparent about the limitations they are facing in regard to call center staffing and ability to stay in compliance with state and federal laws about client communications.
Still, the end of the payment pause will increase financial distress and insecurity, which—as with other aspects of the student loan burden—will have inequitable effects. Students of color, who are more likely to borrow, and face pay and wealth disparities that may inhibit their ability to make full monthly payments, are also more likely to default than their white counterparts. And Black borrowers still face higher rates of default and forbearance than other racial and ethnic groups—despite the existence of IDR and the fact they’re most likely to utilize one of the IDR plans. Borrowers who default on their student loans face a long and arduous road ahead. A default hurts their credit, and they can face years of garnished wages, seized tax refunds, and difficulty borrowing to pay for a car or house, or for additional education. With their credit ruined, defaulted borrowers may also experience difficulty acquiring certain jobs or renting an apartment.
In this area, at least, there is a hopeful development—though it, too, is imperfect. Under the temporary, one-time Fresh Start initiative overseen by Federal Student Aid (FSA, an office of the Department of Education), delinquent and defaulted borrowers can resume their payment in good standing. These borrowers are eligible to have negative credit information removed from their credit reports and to have debt collection suspended. However, borrowers will only receive this relief if they affirmatively ask for it and agree to enter a repayment plan.
Because borrowers must request this relief, it is crucial that FSA provide effective outreach to eligible borrowers. Fresh Start, coupled with the removal of various barriers to enrollment in IDR, will give borrowers of color and low-income borrowers a fighting chance at debt relief.
Root Causes of the Student Debt Crisis
At the same time that the administration is working to meet the needs of indebted borrowers, there are growing calls for executive and congressional action to address how the debt crisis reached its current height.
To address the debt crisis, we need to curb the tuition increases and cuts to state aid that have led countless borrowers into high and unrelenting debt. Americans have pursued higher education as a vehicle for accessing economic opportunity and stability. A changing workforce and renewed focus on professionalization means that those plotting a successful future and entrance to the middle class are more likely to opt for postsecondary education. Unfortunately, today’s college students, both traditional and not, have been met with record-high tuition and enormous student debt balances.
Despite wage stagnation and declining state-sponsored higher education investment, college costs have risen exponentially since at least the 1980s. Both public and private institutions have seen significant increases in tuition as well as room and board. While there is a persistent question about whether the “true” cause of rising tuition is administrative bloat and the availability of federal loans, or lack of investment and increased demand, what is undeniable is that the country has transferred the true cost of college onto the backs of low-wealth families. Students from under-resourced communities face a shortfall between what their families can afford and what the government will provide as a grant. They often opt to borrow student loans. Black borrowers, in particular, carry an overwhelming and disproportionate debt burden.
To permanently solve the student debt crisis, we must imagine new, innovative, and bipartisan ways to address not just reform of the student debt system, but of higher education in general.
There are some positive signs that the urgency of such reform is finally being acknowledged. There is renewed energy for ensuring that postsecondary programs leave students better off than if they’d never enrolled at all. Commentators across the political spectrum are demanding more accountability, calling for tuition caps and policies that require colleges and universities to put skin in the game by taking on some of the risks of student loan defaults. There is also support for efforts aimed at ensuring borrowers aren’t devoting excessive amounts of their earnings to repayment.
This student-centered rhetoric is welcome. However, it is important not to ignore the reality of which students are most harmed by our continued inaction.
Regardless of their degree completion, students of color from financially vulnerable communities face barriers to employment and job retention, and thus, ultimately, student loan repayment. White borrowers face less labor market discrimination and historic barriers to wealth building than people of color, and thus have a built-in advantage. The average Black student loan borrower takes on nearly 50 percent more debt for a bachelor’s degree than his or her white peers.
The financial burden of student debt is partly a result of a long-standing structural system of economic discrimination and exploitation. The average white child is born into a family with ten times more wealth than the average Black child. Children born into wealthy families are less likely to rely on student loans to finance their higher education, and those who do take on less debt.
Even before the COVID-19 pandemic upended the economic mobility of people across racial groups, nearly 20 percent of Black families had negative net worth due to debt. In their thirties, typical Black student loan holders hold a negative net worth—compared to white borrowers, who, by that point, have often broken even. Nearly a decade after beginning their degrees, many Black borrowers see no return on investment. Worse still, two decades after beginning their degrees and incurring their initial debt amount, Black borrowers, in general, see almost no reduction in their loans, with the median Black borrowers still owing 95 percent of their borrowing total. And these borrowers aren’t only carrying debt from their undergraduate education: the vast racial differences in the financing of graduate and doctoral education contribute to the widening racial wealth gap among the college-educated.
The Need for Action
Though the Biden administration has taken crucial steps to support low-income and defaulted borrowers as a return to repayment looms, more must be done in the short term to protect students. While shielding borrowers from negative credit reporting and preventing collections in the period immediately following restart offers borrowers a welcome reprieve, borrowers will continue to struggle in repayment and will rely on their servicers to give them the most up-to-date and accurate information to keep them on track and away from financial ruin.
Biden has proposed an increase in FSA funding for fiscal year 2024, but the size of the increase is predicated on the belief that the agency would have a smaller portfolio, as millions of accounts were set to be closed thanks to cancellation. Now, the cash-strapped FSA will have to implement a new IDR plan and other initiatives without additional staffing or the technological investment needed to support heightened website traffic, especially in the months before repayment formally begins.
Unfortunately, there is no one-size-fits-all solution. Stakeholders must work together to combat the ever-growing student debt crisis. For example, all states should better fund higher education and financial aid.
At the federal level, the country should invest in quality education at institutions that offer students the social and economic mobility that college has always promised. Congress has taken steps to address concerns about quality and return on investment at institutions of higher education and should be equally committed to endowing institutions that get it right. Historically black colleges and universities (HBCUs), for example, make up a very small percentage of the nation’s more than 5,000 postsecondary institutions, yet they produce almost 20 percent of all Black graduates and a disproportionate share of all Black medical doctors. These successes warrant a robust reinvestment that will allow HBCUs to multiply their impact in the low-income communities they serve.
In addition to increasing funding, Congress can improve efforts to repair the PLUS loan program by approving cancellation for those borrowers whose children had a $0 “expected family contribution,” or those low-income borrowers who were eligible for the Earned Income Tax Credit. Congress can also take bold action like expanding and increasing Pell Grants to protect more income for working class families, eliminating community college tuition, incentivizing tuition caps, or stripping aid from colleges that artificially inflate their tuition costs.
Above all, in the short term we must work to shield needy borrowers from the harm sure to come their way from a failed return to repayment. The risk and consequences of delinquency and default—even if borrowers aren’t being sent to collection for the first year—are real. And as long as we continue championing a flawed debt finance system, low-income borrowers will always carry the heaviest burden. Ensuring equal access to high-quality postsecondary education means ensuring students aren’t signing up for a lifetime of economic hardship in their pursuit of the American dream.