President Biden’s new federal student loan repayment plan will cost the government $475 billion over the next decade, according to new economic projection. The updated income repayment plan would exceed the $400 billion cost of the debt forgiveness plan that the Supreme Court rejected last month.
The new repayment plan, announced last year and completed this month by the Education Department, offers borrowers a new option that caps payments for undergraduate loans at no more than 5 percent of the borrower’s income. After a borrower makes payments for either 10 or 20 years (the term depends on the size of the loan), any remaining balance would be forgiven.
The government — the largest lender to Americans who borrow to pay for college — already offers a variety of income-based repayment plans. But a new and revised plan, which the administration has called Saving for Value Education, or SPAR, is much more generous. That means the government, not borrowers, will ultimately pay a larger share of the recipients’ education costs.
Economists for the University of Pennsylvania’s Penn Wharton Budget Model, a nonpartisan research group, estimate that payment cuts on the $1.6 trillion in outstanding federal student loans will cost the government $200 billion. But most of the program’s cost — a projected $275 billion — will come from reduced payments on the $1 trillion in new loans the researchers expect to make over the next decade.
A majority of current and future borrowers will choose the new SAVE payment plan, the economists predicted. “This plan does so much,” said Kent Smetters, a professor at Wharton and the faculty director of the Penn Wharton Budget Model.
The projection of his team eclipses the 156 billion USD that the Ministry of Education estimated that its plan would cost over the next decade. Part of the gap, Mr. Smetters said, is that the Education Department’s estimate took into account the effects of Biden’s debt forgiveness plan before the Supreme Court struck it down. The Penn Wharton model did not.
Karine Jean-Pierre, the White House press secretary, defended the cost of the plan at a news conference Monday after the new economic projection was released. “We can afford to give middle-class Americans, middle-class families, some breathing room,” she said.
Forty-five million student borrowers owe the government money, but nearly all have paused their payments under a pandemic relief measure that was started in March 2020 by the Trump administration and extended several times by the Biden administration. After more than three years, that break will end, with payments scheduled to resume in October.
The Biden administration is scrambling to implement as much of the new SAVE plan as possible before borrowers’ bills come due. But the process will be complicated, and piecemeal. The centerpiece of the plan — reducing payments on undergraduate loans to 5 percent of a borrower’s income, down from the 10 percent charged under previous income plans — will not take effect until July 2024.
Conservative groups and Republican lawmakers strongly denounced the new plan. Representative Virginia Foxx, the North Carolina Republican who chairs the House Committee on Education and the Workforce, called it “nothing more than a backdoor attempt to provide free college by executive fiat.”
But so far, no legal challenges have emerged. The foundation of 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 forgiveness plan that the Supreme Court struck down relied on the HEROES Act, which gave the education secretary greater powers only in times of “national emergency” — as the government declared the coronavirus pandemic is
More broadly, legal groups that would like to challenge the plan are struggling to find a party with the legal standing to do so. The Pacific Legal Foundation, which has supported several of the lawsuits against Mr. Biden’s student debt cancellation plan, said it would like to litigate the new plan but sees significant obstacles.
“You have to prove you’re hurt by the free money or a more generous loan forgiveness program,” said Caleb Kruckenberg, a lawyer for the foundation. “It is not enough to say that I am concerned about the government spending my tax dollars in this way. It’s just a really narrow universe.”
Bharat Ramamurti, the deputy director of the National Economic Council, called the Education Department’s authority to implement the SAVE plan “crystal clear,” adding, “I would be surprised, frankly, if there was a legal challenge.”
After the Supreme Court threw out Mr. Biden’s debt cancellation plan, the administration said it would try again for some sort of bailout effort, this time using the Higher Education Act of 1965 — an approach that requires lengthy rulemaking. The Education Department formally began that process this month.
But Mr. Kruckenberg sees the SAVE plan, which the administration laid the groundwork for last year, as a stealthy move toward similar goals.
“I think this is the administration’s Plan B,” he said. “I think they kind of started this process with the idea that if the loan cancellation didn’t work, which it didn’t, then they could use this as a backup, and it could accomplish a lot of what they wanted — maybe all of it. . of it — constantly.”