Biden Freezes Student Loans after Courts Stop SAVE Plan
For the last few years at FEE and National Review, I’ve spent quite a bit of energy talking about student loan forgiveness.
The reason for my persistence on this topic is that the era of Covid policy has completely turned the tables on how student loans are managed.
Before Covid, student loan policies were relatively stable. Borrowers were generally expected to repay loans on a particular schedule, and the government generally worked with borrowers on getting affordable plans based on income considerations.
Things have changed. The change was made very visible by a recent announcement by Biden’s Department of Education that certain borrowers would have their student loan payments frozen again due to rulings against the new SAVE plan.
If you’re feeling déjà vu, it’s not just you. The Trump administration froze student loan payments in March 2020, and the Biden administration extended the freeze up through October 2023.
Finally, in November 2023, student loan payments were allowed to resume. However, this nearly 4-year-long period of frozen loan payments represented a large amount of loan forgiveness, as I argued in July 2022 for FEE. How does a loan freeze equate to forgiveness?
If the government decides to spend the same amount it budgeted to spend before freezing interest, and it receives less money from interest due to the freeze, it must take more money from present or future taxpayers.
Alternatively, even if the government decided to spend less money to offset the lack of interest received (an otherworldly scenario), taxpayers would still be worse off because they’d be paying the same taxes for less government services provided.
In either case, taxpayers are left holding the bag. Student loan holders who don’t have to make payments or deal with interest accumulation are better off. Interest is forgiven on the public’s dime.
Now the payment thaw is freezing over again. The stated reason is the ongoing legal challenges to the Biden administration’s new SAVE plan. This month, the SAVE plan, recently implemented by the Biden administration, offered extremely low payments (compared to historical precedents) as well as a mechanism to cap interest accumulation which, paired with already existing aspects of federal loan repayment, would lead to significant increases in student loan debt forgiveness.
In another article for FEE, I argued that the SAVE plan would amount to a shadow loan forgiveness program:
Under the new guidelines by the Department of Education, someone making 225% of the federal poverty rate will now have their income completely protected from payments according to Fox Business. That means borrowers earning $32,805 or a family of four with income of $67,500 will be required to make payments of $0.
Even borrowers who make more than those amounts who qualify for a SAVE plan will see lower payments.
But wait, won’t low or zero dollar payments mean the interest on these loans will grow out of control? Nope. The administration is capping interest rates to make sure loan balances don’t grow. So how much do we expect someone to pay on a student loan with a required payment of $0 and no interest accumulation? It’s not hard to see that this is just shadow forgiveness.
It doesn’t end here either… plans already offered loan forgiveness to borrowers who made payments for 20–25 years. So borrowers who have a small payment under Biden’s new SAVE plan will see their balances disappear eventually based on already existing rules.
It’s easy to understand why courts would stop the SAVE plan in light of this. SCOTUS already blocked the ham-fisted attempt of blanket loan forgiveness earlier this year. Why wouldn’t courts block a shadow forgiveness payment plan?
However, in that article I also argued that the courts wouldn’t be able to stop shadowy loan forgiveness. Why? Well, we’re seeing why right now.
The Biden administration has responded to courts blocking the SAVE plan by reinstituting a complete freeze of payments. What happens if the SAVE plan ultimately fails to win in court? My guess is that the Biden Department of Education would simply craft a new plan to sneak forgiveness in the back door. Courts could challenge that plan, but then precedent leads us to believe that payments will just get frozen again.
The point here is simple. While courts can put obstacles in the path of loan forgiveness, the permanent bureaucracy can simply continue to delay payments, too. The result is just a very chaotic-looking version of loan forgiveness.
If anything, this recent exchange between courts and the administration has further vindicated my argument from July of last year. The only way to stop loan forgiveness is to admit the Department of Education-enabled loan scheme itself to be unconstitutional. So long as the Department of Education sets the terms of loans, de facto forgiveness is always on the table. That’s part of why it’s time to get the bureaucracy out of the picture of higher ed.
Editor’s note: This piece originally was published by the Foundation for Economic Education.