The challenge to the student loan program was brought by Republican-led states in one case, and two individuals from Texas in another. In both cases, the Justice Department questioned whether the plaintiffs had legal standing to file their suits.
President Joe Biden on Friday announced that he would be using a 'new path' to ease the burden of student loans through the Higher Education Act, after the Supreme Court found his original debt forgiveness plan unconstitutional.
Biden: I'm announcing today a new path consistent with today's ruling to provide student debt relief to as many borrowers as possible as quickly as possible. We will ground this new approach in a different law than my original plan with the higher education act. pic.twitter.com/d70zEDIPf4— Acyn (@Acyn) June 30, 2023
Second, we're creating a temporary 12-month “on ramp” to repayment.— President Biden (@POTUS) June 30, 2023
This is not the same as the student loan pause, but during this period – if you miss payments – this “on ramp” will temporarily remove the threat of default or having your credit harmed.
This fight isn’t over.
Watch the entire speech below:
* * *
Update (1305ET): Reacting to today's Supreme Court decision striking down his illegal student loan vote-buying scheme, President Biden('s team) tweeted: "Unthinkable. This fight isn’t over. I’ll have more to announce when I address the nation this afternoon."
Unthinkable.— President Biden (@POTUS) June 30, 2023
This fight isn’t over. I’ll have more to announce when I address the nation this afternoon. https://t.co/wGBuwBySB7
Is it something like this? https://t.co/cXe0uDw1P4— Kate🇺🇸 (@KateDAgostino2) June 30, 2023
* * *
In a largely anticipated decision, the Supreme Court on Friday ruled in two separate cases that the Biden administration exceeded its authority with its $400 billion student loan forgiveness plan. The court ruled 6-3 along ideological lines.
The first case, Department of Education v. Brown, was brought by two student loan borrowers who didn't qualify for relief sued to vacate the program on the basis that Biden's invocation of the post-9/11 HEROES Act constitutes executive overreach. The Court ruled unanimously that the borrowers did not have standing to sue - but that the Biden administration also doesn't have the authority to forgive the debt.
"The HEROES Act allows the Secretary to 'waive or modify' existing statutory or regulatory provisions applicable to financial assistance programs under the Education Act, but does not allow the Secretary to rewrite that statute to the extent of canceling $430 billion of student loan principal," reads the opinion.
Proponents of cancellation have warned of dire consequences, such as Persis Yu - deputy executive director of the Student Borrower Protection Center.
"If payments are to resume without cancelation, we can expect a tremendous increase in defaults and forbearance," said Yu, adding "There absolutely must be a plan to avoid the economic devastation."
Writing the dissent was Justice Elena Kagan, who said the court was making national policy in place of Congress and the executive branch.
"Congress authorized the forgiveness plan (among many other actions); the Secretary put it in place; and the President would have been accountable for its success or failure," she wrote. "But this Court today decides that some 40 million Americans will not receive the benefits the plan provides, because (so says the Court) that assistance is too ‘significant.’"
To qualify to challenge the loan-forgiveness effort, the plaintiffs must show they have suffered a specific, rather than generalized, injury that can be remedied by relief from a federal court. It is not enough just to object to the size of the program or even to allege that the president has exceeded his authority.
A panel of the U.S. Court of Appeals for the 8th Circuit gave the states a toehold to continue their litigation, finding that the Missouri Higher Education Loan Authority, a quasi-independent entity, could suffer losses from the program change that would hurt Missouri, one of the challenger states. A different court said the two borrowers, Myra Brown and Alexander Taylor, have standing to proceed because Taylor doesn’t qualify for $20,000 of forgiveness, while Brown is ineligible altogether. -WaPo
Who will be most affected?
Overall, more than 40 million borrowers would have qualified for loan forgiveness through a required application. Before legal challenges halted the plan, borrowers in every state were approved for loan cancellation. Big states such as California, Texas, Florida and New York had the most approvals overall. The District of Columbia had the most approvals in proportion to its adult population, followed by Georgia and Ohio.
According to the Department of Education, over 43 million people collectively owe $1.6 trillion in student-loan debt. These loans include Direct Loans, Federal Family Education Loans and Perkins Loans. Around half of these borrowers owe less than $20,000.
When broken down by age, borrowers 24 and younger owe $103.4 billion in federal student-loan debt. Less than 4% owe over $40,000. The largest cohort of borrowers is those aged 25-34, of which nearly a quarter owe more than $40,000. Of those aged 35-49, more than 1/3 owe more than $40,000.
By race, around 30% of black households had student-loan debt in 2019, vs. around 20% of white households and 14% of hispanic households.
By household net worth, of those who are in the bottom 25%, more than 1/3 hold student debt, vs. 6% of those in the top 10%, per the Federal Reserve.
As noted last week at Real Clear Education, the administration’s plan to transfer up to $20,000 in student loan debt per borrower - from individuals who voluntarily took out loans to finance their college education to unsuspecting taxpayers - was one of the most audacious examples of executive overreach in American history.
Despite its $400 billion price tag, the action is only a small piece of the administration’s strategy to create a massive new public subsidy for higher education. A cynic might wonder whether the headline-grabbing but legally dubious bailout now before the Court was conceived as a decoy to distract public attention from the real centerpiece of the debt-transfer agenda.
With public attention focused on the blanket forgiveness plan (and the pleas of those demanding more), the Department of Education was busy crafting an ambitious plan to bail out future borrowers in perpetuity by changing the rules governing income-driven repayment.
Currently, multiple income-based repayment programs exist. All would cap the payments of enrollees at a percentage of their current income and then wipe away debt that remains after many years of repayment. When income-based repayment plans are designed properly, they align the timing of repayment with career earnings trajectory, such that borrowers pay the loans back faster as their incomes increase. (It is reasonable for doctors with very large loans to have smaller payments in their residency years when salaries are modest).
* * *
As we also noted last week, the restart of student loan payments is expected to slash household spending by $15.8 billion each month.
According to Barclays economist Adrienne Yih, the bank estimates a potential aggregate $15.8bn monthly headwind - or $190 billion per year - to US spending as the average student debt holder sees an incremental monthly payment of ~$390 beginning this fall. This represents an ~8% headwind to monthly personal income, affecting 16% of the US population, and adding pressure to not just consumer discretionary and apparel, but all retail spending.
The analysis is based on federal student loan data for the aggregate $1.4 trillion balance across the 40.5mn borrowers by age cohort. Utilizing a 10-year payment period and a 5.8% interest rate, the bank calculates an approximate $390/month payment across cohorts.
Compared to a median pre-tax personal annual income of ~$57k, this payment represents an approximate 8% headwind to monthly income. In aggregate, this amounts to an "additional" (or rather, original, as the payments were there and then three years ago, they just stopped) $15.8bn in monthly payment for federal student loans affecting approximately 15.5% of the U.S. adult population (and 32% of the 25- to 34-year-old cohort).
As an aside, Barclays' monthly estimate of $15.8bn in incremental payments is conservative as the analysis only takes into account federal student debt (Direct Loans), which is 87.2% of total student debt.
Estimated spending impact to consumer discretionary
- Based on our analysis, the Barclays economists estimate the total impact from the resumption of federal student loans to consumer discretionary spend to be ~$15.8bn (monthly), derived by aggregating the total cost among all Federal loan holders and the Federal loan repayments.
Next, the economists calculated the total percentage of the adult U.S. population that will be impacted by the resuming of Student Loan Repayment (using U.S. Census estimates as of 2022 to calculate the total population size vs. the total amount of recipients of Federal Student Loans, and then further disaggregated that by age group). Based on calculations, 15.5% of the adult (18+) US population will be effected and will need to resume paying their student loans, with an outsized impact among the 25-34 year old cohort (32%)
In short, expect Biden's 2024 platform - should he make it through Huntergate - to rely on blaming the 'MAGA Supreme Court' for going against his vote-buying scheme.