The State of Student Loan Forgiveness: April 2024

Andrew Gillen

Mass student loan forgiveness is terrible policy (see this report for a comprehensive list of reasons), but that hasn’t stopped the Biden administration from trying to forge ahead. While the Supreme Court overturned the administration’s student loan forgiveness plan, every few weeks the Biden White House announces another batch of loans that have been forgiven. In fact, the administration recently celebrated that since taking office, it has succeeded in forgiving $143.6 billion of student loans for around four million borrowers by transferring the responsibility to repay from the students who took out the loans to taxpayers who did not.

But if student loan forgiveness lost in the Supreme Court, how are so many student loans still being forgiven? The answer is that there isn’t a student loan forgiveness plan, there are many plans, some of which are already up and running. Previous laws had already left a plethora of methods to forgive student loans, and many of those laws give the Secretary of Education the ability to expand those programs.

The administration also claims existing law gives it the authority to create new ways to forgive student loans. So the student loans the Biden administration already has or wants to forgive are a combination of existing programs, existing programs the administration has expanded, and new programs the administration is trying to implement.

Here’s a rundown of the administration’s student loan forgiveness plans and actions, which I’ll update monthly.

HEROES (New plan—overturned in court)

This was the big plan that got a lot of attention in 2022 and 2023. The plan was to forgive $10,000 for borrowers making less than $125,000, and $20,000 for borrowers who received a Pell Grant, at a total cost of $469 billion to $519 billion. The alleged authority for the plan was the 2003 HEROES Act. While designed to alleviate loan‐​related hardships for soldiers and reservists serving in Iraq and Afghanistan, the law also covered national emergencies, and the Biden administration argued the COVID-19 emergency gave it the authority to give virtually everyone loan forgiveness.

Most observers were skeptical of this supposed authority. But it was unclear who had standing to sue (standing is the requirement that those filing the suit have a concrete injury from the policy). The companies that service student loans would be the most obvious injured party. However, there was a perception that the Biden administration would punish any servicer that challenged the policy in court, a perception that now appears accurate.

Fortunately, the Supreme Court ruled that Missouri had standing to sue (due to a quasi‐​public student loan servicer that would lose revenue under the plan) and that the plan violated the major questions doctrine (which holds that there needs to be clear congressional authorization for programs of substantial economic or political significance), preventing the policy from being implemented.

Higher Education Act (New plan—forthcoming)

Immediately after losing on HEROES, the Biden administration announced a new effort that would use authority under the Higher Education Act. The administration will likely announce the new plan within the next couple of months. Once announced, this plan will likely face the same fate in court as the HEROES plan because it too will likely run afoul of the major questions doctrine.

SAVE (New plan—still active)

Before diving into this one, it is important to understand the concept of income‐​driven repayment (IDR). Under traditional (mortgage) style loan repayment, the amount and length of repayment are fixed (e.g., $200 a month for 10 years). For the past few decades, the federal government has been introducing IDR plans, in which the amount repaid each month varies based on the borrower’s current income and the length of repayment varies based on how fast they repay their loan. The key features of an income‐​driven repayment plan are:

the share of income owed each month (e.g., 20%)
the income exemption that is protected from any repayment obligation (e.g., the poverty line)
the cap on length of repayment (e.g., 25 years)

IDR is a great idea, providing borrowers with better consumption smoothing across their lifetime and flexible repayment, which helps avoid defaults due to short‐​term liquidity constraints.

But we’ve also botched the implementation. To begin with, a cap on the length of repayment is completely inappropriate. Income‐​driven repayment ensures that payments are always affordable, and borrowers who make so little they do not repay will receive de facto forgiveness even without the cap, so there is no justification for a cap.

The other problem with how we’ve implemented income‐​driven repayment is political—the plans are tailor‐​made to allow politicians to give constituents big benefits today while sticking future taxpayers with the bill. Thus it is no surprise that these plans have grown more generous over time. The first IDR plan, introduced in 1994, had an income exemption equal to the poverty line, a share of income owed of 20 percent, and a cap on length of 25 years. Very few borrowers would receive forgiveness under these terms, and of those who did, they really wouldn’t have been able to repay regardless of whether they received forgiveness. The Obama administration introduced plans with an income exemption of 150 percent of the poverty line, a share of income owed of 10 percent, and a cap on length of payment of twenty years.

The Biden administration’s Saving on a Valuable Education (SAVE) plan took an existing plan (the REPAYE plan) and made it much more generous. It changes the share of income owed from 10 percent to 5 percent, increases the income exemption from 150 percent of the poverty line to 225 percent, and caps the length of repayment at as little as ten years for some borrowers.

By cranking every possible lever to the most generous settings in history, this plan would impose massive costs on taxpayers, estimated at $475 billion for just the next 10 years.

Parts of the SAVE plan have already been implemented, and full implementation is scheduled for July 2024. However, there will soon be two lawsuits that seek to overturn the plan. Kansas and ten other states have already filed suit, and Missouri and Arkansas are planning to file suit soon. The legal questions facing this plan are the reverse of the HEROES plan. For the HEROES plan, the main obstacle was standing. Once that hurdle was cleared, it was fairly obvious that the plan was well beyond what Congress had authorized. But for the SAVE lawsuits, this is reversed. Standing is easily established (for Missouri at least), but the plan does have a much stronger argument for being within the parameters of the law.

Student Loan Payment Pause (Existing and extended plan—now expired)

When COVID-19 hit in March 2020, student loan payments were paused. The pause was supposed to last two months but ended up lasting three and a half years after Trump extended it once and Biden extended it six times. A pause would not normally result in massive student loan forgiveness as it would delay, but not waive, repayment. There would still be a cost to taxpayers (driven by the government’s cost of borrowing), but it wouldn’t be huge.

But recall that IDR plans (unnecessarily) cap the length of repayment, and the pause counted towards that cap. In other words, for any student who does not fully repay before they hit the length of repayment cap, payments weren’t paused, they were waived. We won’t know for many years how many students had their payments forgiven rather than postponed, but the current estimates range from $210 billion to $240 billion. There is virtually no chance for this burden on the taxpayer to be reversed. The only good news is that the payment pause ended, with most borrowers restarting payments in October 2023.

Public Service Loan Forgiveness (Existing and extended plan—still active)

The Public Service Loan Forgiveness (PSLF) program was established during the George W. Bush administration. It allowed for public and nonprofit workers to receive forgiveness after ten years of repayment when they used an IDR plan. While I object to PSLF in principle (as a distorting and non‐​transparent subsidy for the government and nonprofit sectors) and due to the windfalls these borrowers receive (an average of over $70,000 per beneficiary) because PSLF legally exists, it should operate as seamlessly as possible. The Biden administration granted many waivers and other changes to increase the number of borrowers who could benefit under PSLF. Some of these changes were good in that they more faithfully implemented the law. But the administration crossed some lines too. In particular, it started counting some types of deferment as payments (borrowers can get deferment when they cannot afford to make payments, which generally allows the borrower to temporarily postpone payments though interest continues to accrue). The whole point of deferment is to temporarily avoid making payments, so for the Biden administration to give borrowers credit for making payments when they were in deferment is logically, morally, and potentially legally wrong (Cato is part of a lawsuit seeking to end this abuse). The administration also waived income requirements, making more people eligible for the program. 

The Biden administration has forgiven “$62.5 billion for 871,000 borrowers since October 2021” under these programs, which works out to just under $72,000 per borrower. By comparison, a formerly homeless student who receives the maximum Pell Grant for four years would get less than $30,000 in Pell Grants. Some of this would have been forgiven even if the administration hadn’t made any changes to the program, but not all of it. In the future, these burdens on the taxpayer can be reduced by rolling back some administrative changes, but eliminating the program would require legislation.

Borrower defense to repayment (Existing and extended plan—still active, though recent changes are paused during a court case)

When a college engages in fraud or severely misleads students, borrowers can have their debt forgiven under borrower defense to repayment. This is reasonable, as victims of fraud should have some recourse. It is also extremely rare because a college would not just need to dupe a student. It would also need to fool a state, an accreditor, and the US Department of Education, as all three are required to sign off on the legitimacy of a college before its students can take out student loans.

However, the federal government can claw back debt forgiven from the responsible college. This makes borrower defense to repayment a powerful tool for progressives in their war on for‐​profit colleges. If a for‐​profit college can be declared to have substantially misled students, it can be ruined financially by the clawbacks. Indeed, new regulations from the Biden administration would make it much easier to conclude a college engaged in misconduct.

Those changes are currently tied up in court, with an injunction preventing the regulations from being implemented (this injunction applies to the next two sections as well). However, the Biden administration has already been able to forgive over $22 billion under borrower defense to repayment, though they’ve promised to forgo clawbacks on much of it (likely in part to avoid giving affected colleges standing to oppose the changes in court). Some of this was done outside the law. For example, $5.8 billion of debt for Corinthian College students was forgiven even if students didn’t submit a borrower defense claim.

Closed School Discharge (Existing and extended plan—still active, though recent changes are paused during a court case)

Borrowers whose school closes while they are still enrolled or shortly after they have withdrawn can have their student loans forgiven. The Biden administration imposed new regulations that loosened the requirements and has used this as an excuse to forgive other loans as well. For example, Biden forgave $1.5 billion in debt for students from ITT Technical Institute, even if they didn’t qualify for a discharge.

Total and Permanent Disability Discharge (Existing and extended plan—still active, though recent changes are paused during a court case)

Borrowers who are unable to work due to a permanent disability can have their loans forgiven. Historically this was very rare. To protect against fraud, the income of borrowers who had their debt forgiven was monitored to ensure they really couldn’t work.

The Biden administration expanded eligibility and dropped fraud detection efforts, leading forgiveness under total and permanent disability discharge to spike from negligible amounts to $11.7 billion. The new regulations are currently tied up in court.

Conclusion

In sum, the Biden administration has been the most aggressive in history regarding student loan forgiveness. Despite many setbacks, the administration has canceled a massive amount of debt, with most of the burden on taxpayers still to come from future repayments that will no longer be made. While many of the administration’s attempts to forgive student loans have been stymied, there are still many active plans in play, with more on the horizon.