(Bloomberg) -- Millions of Americans with federal student loans have been making payments again, after a moratorium of more than three years. Roughly 40 million people in the US collectively owe more than $1.6 trillion in student debt. The issue is sure to play a role in the 2024 political campaign season, as many young voters fault Republicans and a conservative-majority Supreme Court for stymieing attempts by President Joe Biden, a Democrat, to ease the debt burden. Biden, for his part, has used existing federal payment programs to forgive some loans despite the Supreme Court ruling. The rising cost of college and graduate school, too, means that student debt is a problem that’s not going away.
1. Why did payments resume?
Payments were halted by President Donald Trump in March 2020 as Covid lockdowns began in the US. The freeze also temporarily gave borrowers a 0% interest rate on their loans. The moratorium was extended multiple times. But then last year, Biden and then-House Speaker Kevin McCarthy, a Republican, agreed to a plan to raise the nation’s debt limit and avoid a government shutdown. That deal included a provision that prohibited the Education Department from authorizing another extension after the latest one expired. Interest accruals resumed on Sept. 1, and bills began coming due in October.
2. What role did the Supreme Court play?
In 2023, the Supreme Court blocked a separate initiative by the Biden administration that would have forgiven as much as $20,000 in debt per borrower, after six Republican-led states challenged the plan as exceeding the president’s authority. The court’s conservative majority ruled that Biden couldn’t use the so-called HEROES Act — a 2001 law that allows the education secretary to “waive or modify” student loan requirements — to forgive student debt. Biden said after the court’s ruling that he would try a different legal avenue to provide debt relief, invoking his authority under the Higher Education Act of 1965 to provide financial assistance for college students, though the Education Department hasn’t said how that might play out.
3. Why are some people still getting their loans forgiven?
Despite the Supreme Court’s rejection of Biden’s sweeping student-loan plan, the president has used executive actions over the last year to forgive about $167 billion in student debt held by almost 4.8 million Americans, or less than 10% of borrowers, according to the Biden administration. Many of these accounts should have qualified for relief through programs designed to help low-income, disabled or public-sector workers, it said, but the programs had failed to provide that relief because of administrative problems.
Biden is also proposing a “Plan B” rule that would effectively replace the loan-forgiveness program struck down by the Supreme Court. The more targeted proposal would offer cancellation to borrowers in specific groups, including people with balances exceeding their original principal. More people could also become eligible for forgiveness under the Saving on a Valuable Education (SAVE) program, which lets qualifying borrowers set payment amounts based on their income and family size, rather than their loan balance. The program has enrolled more than 8 million people, the Biden administration says. Administration officials have declined to estimate how many borrowers will eventually see loans forgiven under the program.
4. What are the arguments for and against student debt forgiveness?
Some critics of Biden’s original plan said it would be unfair to those who had already paid back student loans or who worked their way through college to avoid debt. Some progressive activists, like Senator Elizabeth Warren of Massachusetts, said that Biden’s plan didn’t go far enough. She called for forgiving as much as $50,000 in loans, while others pressed for deeper relief for targeted groups, like borrowers who didn’t finish their degrees. And people on all sides of the issue pointed out that forgiving debt would do nothing to alter the economics of education that produced the borrowing in the first place — the price tag for higher education that keeps rising faster than the rate of inflation.
5. How is the resumption of interest and payments affecting borrowers?
Interest began accruing again for most borrowers in September. Since then, consumers have allocated around $34 billion toward paying their student loans. That money has to come from somewhere. Although some retailers had warned that the resumption of payments might affect their businesses, clear evidence hasn’t emerged. A Philadelphia Fed report in February found that the “return to repayment has incrementally affected borrowers.”
6. What happens now?
To help those struggling to restart payments, the Biden administration added a 12-month “on-ramp” through September 2024. Borrowers who miss monthly payments during this period aren’t considered delinquent, reported to credit bureaus, placed in default or referred to debt collection agencies.
--With assistance from Justin Sink, Alex Tanzi and Ella Ceron.
©2024 Bloomberg L.P.