President Biden’s new repayment plan for federal student loans will cost the government $475 billion over the next decade, according to New economic forecasts. The updated, income-driven repayment plan would surpass the $400 billion cost of the debt relief plan that was rejected by the Supreme Court last month.
The new repayment plan, announced last year and completed by the Education Department this month, offers borrowers a new option that limits undergraduate loan payments to no more than 5 percent of the borrower’s income. After the borrower has made payments for 10 or 20 years (the duration depends on the size of the loan), any remaining balance will be forgiven.
The government — the largest lender to Americans who borrow to pay for college — already offers a variety of income-based payment plans. But the new and revised plan, which the administration has dubbed Save for Value Education, or SAVE, is considerably more generous. This means that the government, not the borrowers, will ultimately pay a larger share of the educational costs of the beneficiaries.
Economists at the University of Pennsylvania’s Ben Wharton Budget Model, a nonpartisan research group, estimate that repayment cuts in the $1.6 trillion in outstanding federal student loans would cost the government $200 billion. But the bulk of the cost of the program — an expected $275 billion — will come from reduced payments on the $1 trillion in new loans that the researchers expect to be made over the next decade.
Economists predicted that the majority of current and future borrowers would opt for the new SAVE payment plan. “This plan does a lot,” said Kent Smitters, professor at Wharton and director of the Ben Wharton budget model.
Dropping his team outperforms $156 billion which the Education Department has estimated its plan will cost over the next decade. Part of the gap, Smiters said, is that the Education Department’s estimate factored in the effects of Biden’s debt relief plan before the Supreme Court struck it down. Ben Wharton’s model did not.
Karen Jean-Pierre, the White House press secretary, defended the cost of the plan at a news conference Monday after the release of the new economic forecasts. “We can give middle-class Americans, middle-class families, a little breathing space,” she said.
Forty-five million student loan borrowers owe government money, but nearly all of them have had their payments paused through a pandemic relief measure initiated in March 2020 by the Trump administration and repeatedly extended by the Biden administration. After more than three years, that pause is set to end, with payments scheduled again in October.
The Biden administration is scrambling to get as much out of the new savings plan as possible before the borrowers’ bills come due. But the process will be complex and piecemeal. The focus of the plan — reducing payments on college loans to 5 percent of a borrower’s income, down from the 10 percent mandated under previous income-driven plans — It will not go into effect until July 2024.
Conservative groups and Republican lawmakers have strongly denounced the new plan. Rep. Virginia Fox, the North Carolina Republican who leads the House Committee on Education and Workforce, called the order “nothing more than a covert attempt to provide free college by executive order.”
But so far, no legal challenges have arisen. The basis for the plan is the Higher Education Act of 1965, which gives the Department of Education broad authority over loan repayment plans. By contrast, the debt relief plan struck by the Supreme Court relied on the HEROES Act, which gave the education minister greater powers only in times of a “national emergency” — as the government has declared the coronavirus pandemic as well.
More broadly, legal groups that want to challenge the plan are struggling to find a party with the legal status to do so. Pacific Law Firm, which has supported several lawsuits against Biden’s plan to cancel student debt, said it would like to sue over the new plan but sees significant hurdles.
“You have to prove that you were harmed by free money or by the most generous loan forgiveness program,” said Caleb Krukenberg, the foundation’s attorney. “It’s not enough to say I worry about the government spending my tax money in this way. It’s just a really narrow universe.”
Bharat Ramamurti, deputy director of the National Economic Council, called the Ministry of Education’s authority to implement the SAVE plan “quite clear,” adding, “I would be surprised, frankly, if there was a legal challenge.”
After the Supreme Court thwarted Mr. Biden’s plan to cancel the debt, the administration said it would try again for some kind of mass relief effort, this time using the Higher Education Act of 1965 — an approach that required a lengthy rule-making process. The Ministry of Education officially started this process this month.
But Mr. Krukenberg sees the SAVE plan, which the administration laid the groundwork for last year, as a subtle step toward similar ends.
“I think this is kind of a plan B for the administration,” he said. “I think they kind of started this process with the idea that if canceling the loan doesn’t work, which it didn’t, they can use this as a backup, and he can make a lot of what they want — maybe all of it — permanently.”