Why Is Biden's Student Loan Forgiveness Plan In Limbo? What Should You Do Now?

On August 24, 2022, Biden announced borrowers would be eligible for federal student debt cancellation.

But this good news for about 40 million borrowers who could qualify for the relief has got caught in legal limbo since.

Find out if you qualify for the student loan forgiveness, the legal issues that have caused the forgiveness plan to be grounded for now, and what you can do while it's still on hold.

I have also mentioned the important dates regarding student loan debt at the end of the article.

Are You One Of The Eligible Student Loan Borrowers?

If you made less than $125,000 in 2020 or 2021 — or if you're married and you and your spouse made less than $250,000 — and took out federal student loans before June 30, 2022, you'll qualify for forgiveness.

The amount you should check is your adjusted gross income on tax returns from either of the past two years.

Only federally-held student loans including undergraduate loans, graduate loans, spousal loans, and Parent PLUS and Graduate PLUS loans — are eligible for federal student loan forgiveness.

Federal Family Education Loan (FFEL) Program loans held by the Education Department (ED) or in default at a guaranty agency are eligible.

Also, consolidation loans composed of any FFEL or Perkins loans not held by the ED are eligible as long as the debtor applied for consolidation before Sept 29, 2022.

Private student loans and commercially-held FFELP loans do not currently qualify. If you have such a loan and have exhausted other options, you can look for options like debt settlement and debt consolidation programs.

The debt relief applies only to your loan balances before June 30, 2022. If you took any new loans on or after July 1, 2022, that amount isn't eligible for debt relief.

How Much Debt Will The Plan Forgive?

The student loan forgiveness plan is set to sanction relief of up to $20,000 if the borrower received a Pell Grant in college and up to $10,000 otherwise.

Why Were Lawsuits Filed to Stop Student Loan Debt Cancellation?

Since August 2022, when the student loan debt forgiveness program was announced, several lawsuits have been filed against it by the republicans and conservative groups.

The reasons cited are that the president cannot cancel consumer debt without Congress and that the policy is harmful.

Tiffany Homan, COO of Texas Divorce Laws, says that the main reason for the lawsuits is that the forgiveness plan can put some federal student loan servicers at risk of losing significant revenue, like the major loan servicer headquartered in Missouri, the Missouri Higher Education Loan Authority, or MOHELA.

A whopping 305,000 borrowers in Missouri were approved for loan forgiveness.

The republican-led states that filed the lawsuits alleged that the plan would significantly lower the revenue of state-related agencies that administer the FFELP, which in turn causes financial harm to the states.

How can the plan cause financial harm?

Previously, a borrower could have consolidated their FFELP loans into Direct loans to qualify for student loan debt forgiveness. If enough borrowers do it, the loan portfolios of FFELP agencies will shrink and, thus, reduce the associated student loan payments they would receive from borrowers.

Apart from the republican led states, there's a second legal challenge brought on by two plaintiffs backed by the Job Creators Network Foundation, alleging that they've been harmed by "this arbitrary executive overreach."

The lawsuit says the president's policy violated the Administrative Procedure Act's notice and comment procedure, not allowing plaintiffs to weigh in on the shape of forgiveness.

What's the Biden Administration's Take on this Legal Situation?

The Biden administration maintains that its move is legal and stands by its decision to implement the student loan forgiveness program.

They argue that the HEROES Act of 2003 authorizes the relief. Also, the Biden administration addressed the lawsuit's argument of losing revenue by issuing guidance in September that commercial FFEL borrowers could no longer consolidate their debt to be eligible for its plan.

In addition, the Biden administration is likely to fight against the recent lawsuit filed by the Job Creators Network Foundation by again stating that The Heroes Act of 2003 grants the education secretary the authority to change federal student loan programs during national emergencies without first taking input from the public.

It's also unlikely that the student loan debt forgiveness plan will hurt the concerned plaintiffs in any way as the plan will cost one of them nothing and relieve another of $10,000 in debt.

Will The Lawsuits Be Successful In Discontinuing The Plan?

Given the arguments that the Biden administration has at the ready and plans to put forth in their favor, it's unlikely that the lawsuits will cause the discontinuation of the plan.

According to Tiffany, "the lawsuits are unlikely to be successful in stopping the plan, as the Department of Education and the White House have already indicated their intent to move forward with it."

However, there's no guarantee on what will unfold in the court and in which favor the ruling will go.

What Should You Do Now, As The Plan Is Still On Hold?

According to the ED, monthly payments will resume 60 days after the litigation is resolved and Biden's student loan forgiveness plan gets a green signal.

However, if the program is not implemented and the litigation stays unresolved by June 30, 2023 – monthly payments will resume 60 days from the date.

So in the meantime, the best course for you would be to prepare to repay the remaining balance. Use the payment pause to optimize your finances, keeping paying off the debt as the focus.

For example, save a good chunk of your discretionary income to pay down your student debt.

Also, remember that if you got a refund during the pandemic, the amount you received would be added to your balance. So, don't spend that money yet.

"Borrowers should now keep track of any updates related to the student loan cancellation plan, as it is still on hold," said Tiffany. Update your contact information with your student loan servicer and at studentaid.gov so you can receive timely updates about your loans.

She also recommended considering exploring other student loan forgiveness options that may be available in your area.

Even if the forgiveness plan doesn't see the light of day, there may be good news for you - a more generous income-driven repayment plan awaits.

Here's what you can expect under this IDR plan -

• Individual borrowers making less than $32,800, or a family of four making less than $67,500, can expect to see $0 monthly bills.
• Most other borrowers would see a 50% reduction in their payments.
• Instead of taking 20 to 25 years to pay off their debt, students who borrow less than $12,000 would have their remaining balances erased after ten years of payments.

Source: NerdWallet.

The new repayment plan isn't available to borrowers yet, but as per ED, it's expected to be finalized later this year.

For PSLF qualifiers, the payment pause has been a boon. They aren't required to make payments just like everyone else, yet they will still receive credit under the Public Service Loan Forgiveness program as though they did make the payments.

Borrowers who previously enrolled or enrolled in an IDR plan during the payment pause period can enjoy similar benefits. They don't have to make payments and still receive credit under the IDR Student Loan Forgiveness Plan.

Important Dates Regarding Biden's Student Loan Forgiveness Plan

Feb 28, 2023: Oral arguments regarding the legitimacy of Biden's student debt relief plan will take place in the U.S. Supreme Court. It's also the last day to self-certify income for income-driven repayment.

May 1, 2023: If you have privately held FFEL, Perkins Loans, or HEAL, you must apply to consolidate them into the federal Direct Loan program by this date to get credit for those payments.

Jun 30, 2023: By this date, the student loan payment pause will end if the lawsuits get resolved. Payments would start in 60 days.

Jul 1, 2023: For the 2023–2024 school year, federal student loans will have new interest rates.

Aug 28, 2023: Student loan payments will resume by this date if lawsuits remain unresolved.

Dec 31, 2023: Borrowers have until this date to apply for student loan forgiveness, assuming the program survives court challenges.