The anticipated $10,000 student loan forgiveness has been halted by the Supreme Court. Here’s what you should do next.

The Supreme Court has blocked President Biden’s plan to forgive student loan debt for 20 million borrowers.

In a 6-3 decision, the court ruled that the President lacks the authority to implement this initiative, which aimed to forgive up to $10,000 for borrowers earning less than $125,000 annually (or $250,000 for couples). Pell Grant recipients would have seen up to $20,000 forgiven, totaling an estimated $430 billion in debt relief.

“This decision is disheartening for borrowers already under pressure as payments resume on existing loans,” states an expert. “Women, who disproportionately hold student debt, will particularly feel the impact due to ongoing wage disparities.”

This ruling is a setback for all borrowers after nearly a year filled with uncertainty, according to a financial analyst.

Next Steps for Student Loan Borrowers

1. Prepare for payment resumption. Payments that were paused for the past three years will restart on October 1, with interest accruing again from September 1. Ensure your bank details are current by logging into your student loan portal. Check your loan servicer, as there may have been changes in the industry that you missed.

2. Don’t panic if you miss a payment. The Biden Administration has introduced an “on-ramp” period for those returning to payments. During the next year, missed payments won’t affect your credit score, and loans won’t go into default. However, aim to get back into the routine of timely payments as soon as possible.

3. Familiarize yourself with the new income-driven repayment plan. The SAVE plan (Saving on a Valuable Education) reduces the payment percentage to 5% of your discretionary income for undergraduates (10% for graduates), down from 15%. Additionally, the plan allows for more income to be protected, potentially saving borrowers substantial amounts. Remaining undergraduate debt is forgiven after 20 years, or 25 years for graduate debt. Note that Parent PLUS loans are excluded. Current REPAYE participants will transition to SAVE plans automatically. Apply here if you’re not enrolled.

Avoiding Common Mistakes

“One of the biggest mistakes now would be to assume that you can just skip payments because forgiveness isn’t happening,” warns a student loan expert. “Neglecting payments can lead to severe repercussions, including damage to your credit score and legal action from your loan servicer.”

While the payment freeze has been extended multiple times, it won’t happen again. If you’ve been in forbearance, it’s crucial to check your status and take action before payments resume. With many borrowers expected to miss their first payment, being proactive is essential.

Your financial situation may have changed over the past three years, as many borrowers have experienced life changes such as starting families or buying homes. Review your budget to incorporate loan payments effectively.

Other Paths to Student Loan Forgiveness

There are still options for securing federal student loan forgiveness. “The administration has streamlined access to lower monthly payments through income-driven repayment plans and Public Service Loan Forgiveness (PSLF),” the expert notes. Consistent payments over 20-25 years can lead to debt cancellation, making it crucial to ensure your payments resume smoothly.

Utilize the “student loan simulator” at studentaid.gov to find out which repayment plan suits you best. Depending on your income, you might qualify for payments as low as $0. Previously, borrowers needed to update their income manually, but this is now done automatically via IRS data. If your earnings have recently increased, check your repayment plan to ensure it aligns with your current financial situation.

Additional forbearance or deferment options are available if you face hardship. “If you're unemployed or dealing with health issues, you can apply for specific types of forbearance,” the expert explains. Remember, unlike the previous freeze, interest will accrue during these periods, potentially increasing your overall balance.

For more information on these options, the best resource is studentaid.gov.

Possible Responses from the President

Experts suggest that the administration might need to reevaluate the program. Biden could revise the strategy or explore alternative legal justifications to move forward, but uncertainty remains for borrowers.

While the new income-driven repayment plan and “on-ramp” offer temporary relief, other changes may be considered, such as reducing the time required for forgiveness from 20-25 years to 10-15 years. Discussions are ongoing regarding recognizing the last three years of forbearance towards the forgiveness timeline, along with simplifying access to PSLF.

Final Thoughts

With student loan payments resuming soon, implementing effective financial habits is crucial. Ensure you pay on time, and consider paying more than the minimum when possible. If you're struggling, now is a great time to start budget planning. Our financial coaching program can help you get on track.