After the Supreme Court ruled against President Joe Biden and his plan to forgive nearly $430 billion in federal student loan debt, borrowers will be faced with making payments for the first time since March 2020.
Had the plan gone through, some borrowers would have gotten up to $20,000 in relief. The plan would have completely erased federal student loan debt for millions of borrowers.
According to the Department of Education, interest on federal student loans will begin accumulating in September. Payments will be due starting a month after.
SEE MORE: Get ready: Student loan interest, payments set to resume
Can Biden extend the freeze?
It appears that is unlikely. As part of a deal to raise the debt ceiling, Congress ordered an end to the freeze at the start of September. Although interest will resume on loans, borrowers will not be required to make a monthly payment until October.
The deal with Congress also preserved several changes President Biden made to how student loan payments are processed.
How income-driven repayments are changing
The Department of Education is encouraging borrowers who might struggle with payments to explore its new income-driven repayment plans. The plans are available on the Department of Education website.
According to the department, there are four different income-driven repayment plans available.
The newest income-driven repayment plan implemented by the Biden administration means most borrowers will have lower monthly payments than before the pandemic.
Previously, borrowers using income-driven repayment plans on undergraduate loans were expected to pay 10% of their discretionary income. Discretionary income was previously considered any dollar made above 150% of the poverty level.
Now, borrowers with only undergraduate loans will be expected to pay 5% of their discretionary income. The amount considered discretionary income increased to 225% of the federal poverty level.
Previously, a borrower with undergraduate loans with a family of four with an income of $70,000 living in the continental U.S. would have been expected to pay about $2,500 a year — or $208 a month — in payments. Under the revised plan, that person would pay about $125 a year — or just over $10 per month — in student loan payments.
Under changes made by the Biden administration, those using income-driven repayment plans could have the rest of their balance eliminated after a period of time.
Those who initially borrowed less than $22,000 will have their outstanding balance forgiven after 10 to 20 years in repayment, depending on the amount borrowed. Undergraduates who borrowed more than $22,000 can have their remaining debt erased after 20 years. Those with grad school debt would not be required to make payments after 25 years.
The plan also ensures balances won't increase as a result of unpaid interest.
While Congressional Republicans previously objected to these changes, they relented in the debt ceiling deal.
"Income-driven repayment plans usually lower your federal student loan payments. However, whenever you make lower payments or extend your repayment period, you will likely pay more in interest over time — sometimes significantly more. In addition, under current Internal Revenue Service rules, you may be required to pay income tax on any amount that's forgiven if you still have a remaining balance at the end of your repayment period," the Department of Education said.
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How will Americans respond?
When payments do resume, the Brookings Institution said millions will likely be unprepared to make payments.
"Regardless of one’s view on the merits of Biden's loan cancellation plan, it is dangerous to ignore the substantial likelihood that judicial rulings will end the payment pause, strike down cancellation, or both. Failing to prepare at-risk borrowers for these outcomes is irresponsible and may inflict more harm on those who have already spent years struggling with burdensome student debt," the report said.
The White House said 26 million Americans had applied for student loan forgiveness. The White House estimated that 40 million borrowers would be eligible for the plan had it been allowed.
But the changes made while the Supreme Court contemplated Biden's debt forgiveness plan might make the resumption of payments more palpable.
"We cannot return to the same broken system we had before the pandemic, when a million borrowers defaulted on their loans a year and snowballing interest left millions owing more than they initially borrowed," said U.S. Secretary of Education Miguel Cardona. "These proposed regulations will cut monthly payments for undergraduate borrowers in half and create faster pathways to forgiveness, so borrowers can better manage repayment, avoid delinquency and default, and focus on building brighter futures for themselves and their families."
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