Key Points:

• The Biden administration announced $39 billion in debt forgiveness for 804,000 borrowers on Friday.
• Beneficiaries may worry whether courts will likely deny such relief, as the Supreme Court did on June 30 when it ruled against a different, more comprehensive debt forgiveness proposal.
• According to experts, the most current looks to be on solid legal ground and is based on debtors in income-driven repayment programs for lower wages.

The Biden administration said Friday that it will erase $39 billion in student debt for 804,000 students, many of whom may be wondering whether the effort would meet the same fate as the Supreme Court’s rejection of the forgiveness proposal last month.

Experts on student loans believe this one will survive.

“Undoubtedly, you’ll see some legal complaints,” said Mark Kantrowitz, a higher education specialist. “But they won’t go anywhere.”

“I think anybody who gets this [forgiveness] can be assured that it’s going to stay,” he continued.

WHAT DISTINGUISHES THE TWO DEBT FORGIVENESS ACTIONS?

The current move is not the same as the overall debt-cancellation plan requested by the White House, which was rejected by the Supreme Court in a 6-3 ruling on June 30. This measure would have wiped up to $20,000 in federal student debt for tens of millions of students. It was anticipated to cost $400 billion.

The announcement on Friday is for debtors on income-driven repayment arrangements. There are four of these strategies, each of which aims to make loan payments more reasonable for lower-income individuals.

Depending on the plan, IDR plans restrict monthly payments at 10% or 20% of a household’s discretionary income. The United States Department of Education is attempting to implement a new plan with a 5% limit.

Importantly, borrowers who make regular payments over a period of 20 or 25 years have their outstanding loan sums eliminated.

However, the Biden administration said that, despite the fact that debtors had earned it, forgiveness had not happened in many instances owing to administrative mistakes.

Beneficiaries of the new program will have their debt wiped automatically in the coming weeks, according to the Department of Education.

“For far too long, borrowers fell through the cracks of a broken system that failed to keep accurate track of their progress towards forgiveness,” said US Secretary of Education Miguel Cardona in a statement announcing the move.

THE MOST CURRENT SCHEME FOLLOWS A DIFFERENT LEGAL PRECEDENCE.

Last Monday, several senators published remarks challenging the legality of the latest forgiveness measure.

Rep. Virginia Foxx, R-North Carolina, leader of the House Committee on Education and the Workforce, for example, claimed the Biden administration was “trampling the rule of law” and seeking to “circumvent” the Supreme Court’s recent debt forgiveness verdict.

Experts say the two actions, however, are based on distinct legal precedents.

“The two programs have nothing to do with one another,” said attorney Abby Shafroth, co-director of advocacy and director of the National Consumer Law Center’s student loan borrower support program.

The Heroes Act of 2003 served as the foundation for President Joe Biden’s expansive — and now-defunct — forgiveness scheme unveiled in August 2022. During national crises, this statute provided the president the authority to amend student loan schemes.

The White House said that the Covid-19 epidemic was one of these emergencies. At the start of the Covid-19 outbreak, the Trump administration used the Heroes Act to halt student loan payments. This delay continues now, but it will expire in the autumn.

The Supreme Court ruled against the Biden administration. According to the judges, the Department of Education need congressional authorisation to erase such a substantial amount of consumer debt.

However, with the inception of income-driven repayment arrangements in the 1990s, Congress has permitted debt forgiveness.

“This program is narrowly tailored to people who have already been in repayment for decades,” Shafroth said. “It all goes back years and is really about the proper implementation of a program established by Congress in 1995.”

She emphasized that the idea is on “really solid legal ground.” In fact, she claims that the Department of Education was nearly legally obligated to correct earlier mistakes or face litigation from borrowers.

The Education Department further said that the proposal is not subject to legal challenges.

“Congress passed a law explicitly directing the Department to create income-driven repayment programs and use them to provide forgiveness to eligible borrowers,” said a Department representative in an e-mailed statement. “It is the Department’s responsibility to ensure that these programs function properly, and that is what we are doing with the account adjustment fixes.”

Beneficiaries of the new policy are mostly individuals who are or were enrolled in the Income-Contingent Repayment program, the only one of the four IDR programs that has been in place long enough to provide debt forgiveness, according to Kantrowitz. According to him, the typical borrower in that program has a debt amount of $48,000.

THE ORIGINS OF IDR FORGIVENESS PRECEDE A SUPREME COURT DECISION.

However, Kantrowitz believes the Biden administration had considerable latitude in determining the breadth of forgiveness.

That leeway primarily addressed whether particular loan installments should or should not be included against a borrower’s overall payment total, and, eventually, whether they had or had not met the criterion for debt forgiveness (i.e., by making two decades of regular payments).

According to Kantrowitz, the Department of Education examined three major categories in this regard: economic hardship deferments, loan forbearance, and partial or late payments. According to him, it seems to be “well within” the Department of Education’s discretion to select which contributions count and which do not.

“The court is likely to give the federal agencies great deference on those matters,” he added.

Last year, the Department of Education said that it will conduct a review of all IDR participants and make a one-time modification to their accounts. The newest step is the outcome of that evaluation, which was revealed in April 2022, before Biden presented his far-reaching proposal to erase up to $20,000 in debt for all debtors in August 2022.   

Experts say that the origins of Friday’s proposal to erase $39 billion in debt predate both the Supreme Court verdict and the initial policy declaration on which the court decided.

Furthermore, legal problems are essentially irrelevant for debtors who get relief before any form of action is filed, according to Kantrowitz. “The court will not take [your] forgiveness back.”