July 11, 2024

Student Loan Crisis: America’s $1.6 Trillion Dilemma

Image Credits: Kent Nishimura/Los Angeles Times via Getty Images

A Slow Return to Repayment

Student loan borrowers in the U.S. are taking their time resuming repayments after the last pandemic-related pause expired late last year. Repayments were paused for borrowers of federal student loans from mid-March 2020, when the COVID pandemic began, and remained in effect until Sept. 1, 2023, 3½ years after the repayment pause began.

The Numbers Behind the Debt

Data from the Department of Education shows that, as of the end of March of this year, almost 20 million borrowers have resumed making payments on their student loans, while roughly 19 million haven’t done so, leaving their accounts in a state of delinquency, default, or otherwise paused through deferment or forbearance. Borrowers have until September to take advantage of a so-called on-ramp that allows them to hold off on making payments without having the non-payments reported to credit bureaus. However, their accounts continue to accrue additional interest while the on-ramp is in effect.

The Growing Debt

The data showed that 42.8 million recipients of federal student loans owed a total of $1.62 trillion in debt as of the end of March. The number of recipients declined to its lowest level since the third quarter of 2022 amid President Biden’s student loan handout plans seeking to cancel or reduce outstanding balances for borrowers. Several iterations of Biden’s student loan debt cancelation plans have been rejected or put on hold by federal courts, prompting the administration to explore different ways to approach the issue that may pass legal muster.

Legal Battles and New Plans

The Biden administration’s new income-driven repayment (IDR) program, the Saving on a Valuable Education (SAVE) Plan, was the latest version to encounter legal headwinds. Last week, a federal court in Missouri barred the Biden administration from granting additional forgiveness to borrowers under the SAVE Plan. A federal judge in Kansas also found that the SAVE Plan was unlawful last week. However, a federal appellate court put that ruling on hold Tuesday, allowing the Education Department to continue cutting payments under the plan.

The SAVE Plan Explained

Announced in 2023, the SAVE Plan modified and replaced the existing IDR REPAYE Plan. The SAVE Plan calculates borrowers’ monthly payments based on their income and family size. It lowers costs for nearly all borrowers while granting forgiveness to borrowers who initially took out $12,000 or less in loans after ten years. It also includes an interest benefit for borrowers who make their total monthly payment, but the amount needs to be more to cover their monthly accrued interest. The federal government pays the remainder of the monthly accumulated interest under the plan. So, in effect, this provision prevents balances from growing due to unpaid interest.

As the nation grapples with this $1.6 trillion challenge, the path to resolving the student loan crisis remains fraught with legal battles and economic uncertainty.

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