Student Loan Forgiveness or Forget About It?

May 15th, 2023 by Blake Pinyan

Since the beginning of the COVID-19 pandemic, student loans have been a subject of much attention. With so many changes in just the past few years, it has become difficult to keep track of what is the law and what is a proposal. In this article, we provide a refresher on the evolution of student loan developments from early 2020 to the present.

The Evolution

March 13, 2020

Federal student loan payments are automatically paused as relief from the pandemic. Interest rates on the loans drop to 0%, meaning no interest accrues during the deferral.

August 8, 2020 / December 4, 2020 / January 20, 2021 / August 6, 2022

The deferral program gets extended through December 31, 2020, then January 31, 2021, then with no announced end date, and then through August 31, 2022.

August 22, 2022

President Biden announces a new student loan forgiveness plan for Federal loans.

  • Individuals are eligible for forgiveness of up to $10,000 of their federal student loans if their income was below $125,000 in tax year 2020 or 2021 for single filers.
  • For anything other than filing single, that number is $250,000.
  • Pell Grant recipients were awarded double the forgiveness, so up to $20,000. The Pell Grant is a federal award to certain undergraduate students that qualify based on financial need.
  • The Federal loans that qualify for forgiveness include Direct Loans, Perkins Loan Program, Family Education Loan Program Loans, and Defaulted Loans.

What wasn’t clear at first, and later discovered, is that the program requires those who believe they qualify to apply for forgiveness.

October 18, 2022

The application for the student loan forgiveness plan becomes active and an influx of borrowers apply.

October 21, 2022

The forgiveness program gets held up by an injunction issued by the U.S. Court of Appeals. This came a day after six Republican-led states – Nebraska, Missouri, Arkansas, Iowa, Kansas, and South Carolina – sued the Biden Administration for loopholing around congressional authority, jeopardizing future state tax revenues, and hurting state entities that invest in or service student loans.

November 18, 2022

The Biden administration asks for the forgiveness program to go into effect while numerous lawsuits are being filed against the program.

November 19, 2022

Millions of applicants for the forgiveness program received “approval” of their claim despite the relief being in limbo, awaiting the Supreme Court’s say. They were informed that no relief was coming yet. Biden also further extended the student loan deferral program through the end of June of 2023.

February 28, 2023

The Supreme Court opens the case for the Biden vs. Nebraska and U.S. Department of Education vs. Brown court cases.

Where We Stand

As a result of all the legal action taken against the student loan forgiveness program, the application for borrowers to request forgiveness is no longer open. The two lawsuits have completely halted the student loan relief program. On the bright side, 26 million individuals were able to apply beforehand, and their applications will stay on file. Out of those, 16 million were approved for debt forgiveness if the lawsuits get settled in their favor. For those that didn’t apply in time, they need to wait until things get sorted out with the Supreme Court cases.

Biden vs. Nebraska is a coalition of six states (Nebraska, Missouri, Arkansas, Kansas, Iowa, and South Carolina) that are threatening the forgiveness could lead to smaller contributions from the Missouri Higher Education Loan Authority (MOHELA). Essentially, MOHELA directs money to Missouri State University, and if it has fewer customers due to the forgiveness, then it won’t be able to fulfill the contribution obligations.

The U.S. Department of Education vs. Brown’s case is fronted by conservative Republicans for the most part and claims that the Biden Administration overstepped its authority by unilaterally forgiving student loans without getting the buy-in from Congress.

For both cases, we are still waiting on verdicts. At this point, we do know that June 30, 2023, is believed to be the last extension for the student loan deferral program. The way that it is framed right now is that student loan payments will resume from the earlier of the Supreme Court’s decision on the forgiveness program or 60 days following June 30, 2023.

This leads one to believe that Federal student loan payments will start back up again at some point in 2023. Since they have been on deferral for over 3 years now, it will absolutely be an adjustment for some from a cash flow standpoint. Delinquency/default rates will likely rise once payments resume. The good news is that there is a new income-driven repayment plan that will hopefully help those on the cusp once it gets implemented.

As far as the promised forgiveness of $10,000-$20,000 worth of Federal student loans, it’s anyone’s guess as to whether this will happen or not. If the Biden Administration prevails in court, 16 million Americans could see their approved debt discharged. We can’t predict what’s going to happen, but rest assured that we’ll stay on top of any developments and let you know whatever the outcome.