Best New Ideas in Money

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Jillian Berman: About 28 million borrowers will be returning to repayment this fall when payments resume. That's an unprecedented number of borrowers to enter repayment at once.

Stephanie Kelton: Welcome to The Best New Ideas in Money, a podcast for MarketWatch. I'm Stephanie Kelton. I'm an economist and a professor of economics and public policy at Stony Brook University.

James Rogers: And I'm James Rogers, a financial columnist at MarketWatch.

Stephanie Kelton: Each week we explore innovations and economics, finance, technology and policy that rethink the way we live, work, spend, save and invest.

James Rogers: This week we're going to be tackling a topic that's been at the forefront of policy debates for the last several years and will continue to be for the foreseeable future. We're talking about student debt cancellation.

Stephanie Kelton: It's a topic we've discussed on the show before and student loans have been making big headlines again recently. At the end of June, the Supreme Court announced that the Biden Administration's plan to cancel up to $20,000 for many borrowers couldn't go forward.

Speaker 4: The court has struck down a Biden administration program that would have offered individual borrowers up to $20,000 of student loan forgiveness. They have found that Biden did not have the standing under a (inaudible)

James Rogers: There's also about to be a huge change in student loans. After more than three years, the pandemic's moratorium on loan payments and interest accrual is coming to an end. We sat down with Jillian Berman, MarketWatch's Deputy enterprise Editor, who covers student loans. She joined us to unpack the Supreme Court's ruling, the Biden administration's plan B and how borrowers can prepare themselves for payments resuming.

Jillian Berman: What the Supreme Court was considering was two questions. The first is whether the parties who were bringing the lawsuits challenging the plan had standing to sue, which is basically the right to bring a case to court. And then the second question was basically the merits of the case, so whether the Biden administration exceeded its authority in authorizing this debt relief plan. They found six to three that one of the parties who brought a lawsuit to sue had standing, so that was six Republican lead states and basically the Supreme Court said that the states had a right to bring their case to court, and that was because one of the states, Missouri, had been injured by the policy, due to a relationship Missouri has with student loan (inaudible).

Stephanie Kelton: Student loan servicers are companies that process loans for borrowers. So the argument here was that if student debt was canceled, Mohela, as a student loan servicer would lose revenue and as a result, Missouri would lose revenue.

Jillian Berman: The standing issue was really one a lot of scholars and people who watched the court had questions about, so even some conservative scholars who thought that the Biden administration didn't have the authority to cancel student debt. Then, that the parties case for standing was not good and they urged the court to not find that the states had standing. And during oral argument, which is when the parties bring their case before the justices, Amy Coney Barrett, who is part of the court's conservative wing, really pressed the attorney representing the six Republican states who brought the suit on this connection between the state of Missouri and Mohela.

Stephanie Kelton: As an entity separate from the state of Missouri, Mohela could sue and be sued on its own, but Mohela executives said they weren't involved in the decision to sue and attorneys representing the six states had to use a records request to get documents from Mohela for the case.

Jillian Berman: That means that Mohela wasn't voluntarily turning over its records and so that raised a lot of questions for the justices and also for legal minds about whether Missouri would actually be harmed if Mohela was harmed. But in the end, she and the other five conservative justices did say that they had standing and that meant that they could get to the second question, which was, did the Biden administration exceed its authority in authorizing the debt relief plan? And again, they said yes. Basically, they looked at the text of the law that the Biden administration used to ground its legal authority for the plan, and they said, "This law does not allow the Secretary of Education to cancel student debt, and so therefore this plan is illegal and you can't go ahead with it."

James Rogers: Despite the ruling, the administration isn't ready to throw in the towel on student debt forgiveness.

Jillian Berman: A few hours after the ruling, President Biden came out and said, "The Supreme Court knocked down the debt cancellation plan we have in its current form. It said that this law, called the Heroes Act, does not authorize us to go forward with this plan, but we're going to try again. There's another law that we think gives us the authorization to do this, and so we're going to take another stab at it. It's going to be different, it's going to take longer, but we're going to try again." The Heroes Act, which is the law that the Biden administration grounded its first debt cancellation plan in, is a law having to do with the Secretary of Education's power during a national emergency. Basically it said that the Secretary of Education has the power to waive or modify federal student loans in the event of the national emergency. And because it's tied to a national emergency, none of the regulatory process that goes along with making other laws gets involved there. So Biden administration said COVID-19 pandemic is a national emergency, therefore the Secretary of Education, under the Heroes Act, has the right to cancel the debt.

Stephanie Kelton: After the ruling. Biden said he would ground his second attempt at student debt forgiveness in another law, the Higher Education Act. That law, signed by Lyndon B. Johnson in 1965, allows the Secretary of Education to compromise, waive or release federal student loans.

Jillian Berman: Under the Higher Education Act, any laws that have to do with financial aid, generally have to go through a regulatory process. That can take several months. It involves convening stakeholders to discuss the parameters of the plan. They try to reach a consensus. Often they don't, but at the end of that period, the Department of Education issues a proposed rule. People can submit comments on it and then they receive and address the comments and then they issue a final rule. So typically that whole process can take anywhere from several months to be here. The Biden administration says it's going to move as quickly as possible, but they are having multiple negotiating sessions that they're staggering a few weeks apart. So we know at least that that process is going to take a few months.

James Rogers: While it's unclear how long the process might take, what we do know is that it won't be complete before the pandemic pause on loan payments is up.

Jillian Berman: Student loan payments are presuming for the first time in more than three years, starting in the fall. In September, interest will begin accruing again on student loans. During the COVID payment pause, there was no interest accruing on student loans. That will end September, and starting September interest will accrue again. In October is when borrowers will be expected to make their first payment. The exact timing is going to depend on your own personal loan cycle. Some people make payments on the sixth, some people on the 10th, then it's just going to depend on your billing cycle. But sometime in October is when borrowers will be expected to make their first payment

James Rogers: In his speech following the Supreme Court ruling, Biden also announced some measures aimed at making it easier for borrowers to return to repayments this far. The first, an on-ramp to repayment.

Jillian Berman: One of these things was the on-ramp, so-called on-ramp, and basically what this does is it protects borrowers from the most severe consequences of not paying their student loans for 12 months after payments resume. So that means that if you don't make a payment during this time, they're not going to tell the credit bureaus, they're not going to refer you to collections, but interest will keep accruing on the loan. And a point that President Biden made that other administration officials have made about this on-ramp is that it is not the same as the laws and if you can afford to make payments, you should. Basically it's only protecting borrowers from the harshest consequences of not paying your student loan. The clock is just going to keep ticking if you don't make payments during this time. In terms of protections, one thing that the Biden administration announced, along with the on-ramp and the second stab at loan forgiveness, is a new repayment plan that will significantly cut monthly bills for many borrowers. Some of the provisions of this plan are going into effect when the payments resume and some are going into effect in July, 2024. But even the ones that are going into effect in the fall, could help some borrowers at least slightly lower their monthly payments.

Stephanie Kelton: This new repayment option is called the SAVE Plan and will be part of the income-driven repayment program. According to the White House, all student borrowers in repayment will be eligible for the plan and can begin enrolling this summer.

Jillian Berman: These are payment plans that allow borrowers to repay their debt as a percentage of their income, in a mortgage style. You pay the loan off in 10 years. A lot of times that kind of payment is too high so the government offers this option that your loan payment is tied to your income, not tied to your balance. One benefit of the SAVE Plan is that borrowers who were making these payments tied to their income, sometimes the payments were so small that it didn't even cover the interest on the loan, which meant that you would be throwing money at the loan each month, but you would see the balance grow and grow and grow. One of the benefits of the SAVE Plan that's going to take effect when payments resume, is that borrowers who make payments that are so small that they don't cover the interest won't see those balances grow. Essentially, the government is going to cover the unpaid monthly interest, so the balance will just stay the same. So that's a nice psychological benefit and I think for some borrowers could be helpful. The SAVE Plan also protects a bit more of borrower's income. So your monthly payment is based on your income minus a certain amount that accounts for necessities and under the SAVE Plan, that amount that accounts for necessities is higher.

James Rogers: Coming up, we'll get into more on income-driven repayment plans and other steps that might help some borrowers. Plus, when repayments start in October, will the economy take a hit? That's after the break?

Stephanie Kelton: Welcome back to The Best New Ideas in Money. Before the break MarketWatch's, Jillian Berman took us through where student debt forgiveness stands after the Supreme Court knocked down the Biden administration's first plan.

James Rogers: Opponents of student debt forgiveness cheered the legal victory, but many borrowers didn't share that reaction. We asked Jillian how people with student loan debt are feeling right now.

Jillian Berman: When the Supreme Court issued its ruling, many borrowers were angry, though some said that they weren't surprised. They had held out a sliver of hope, but once it came down, many borrowers and advocates were calling on Biden to try again. Some that I spoke with were still frustrated. They were confused by what exactly this meant and it just reinforced a lack of trust that some borrowers have in the student loan system and in the government's approach to student loan. They weren't sure exactly how it would ultimately affect them and whether they would see relief from the steps that his (inaudible) is taking.

James Rogers: In the meantime, payments are set to resume this fall, but for borrowers who are concerned, there are some steps to take.

Jillian Berman: Borrowers who might be interested in a lower payment and think they maybe need a lower payment, can apply for income driven repayment plans on the Department of Education's website. That's something that they should get started on now because the processing might take a little bit of time and when payments resume, student loan servicers will be getting a crush of calls and inquiries. And so if you can get ahead, it could be helpful. You can also call your student loan servicer now and say, "I'm not sure I can afford my payment when it resumes this fall." And they ideally will talk you through some of these options.

Stephanie Kelton: While we're on the topic of those student loan servicers, many borrowers have had their servicer changed during the pause.

Jillian Berman: About 28 million borrowers will be returning to repayment this fall when payments resume. That's an unprecedented number of borrowers to enter repayment at once. About 40% of borrowers will have a new servicer when student loan payments resume in the fall according to the CFPB, so that means that the organization where you were sending your student loan check or that you called on the phone to get help with your student loan before the pandemic, might not be the organization that you do that with when payments resume this fall. So there is potential for that dynamic to create problems for borrowers confusion, just naturally confusion. In addition, in the past, when student loan accounts have been transferred, sometimes payment accounts have been lost, payment history has been lost. Servicers say that's not going to happen. They're trying not to make that happen, but it's something that has happened in the past. One thing that the Department of Education reminds people often is that you never have to pay to make a change to your federal student loan or to enroll in a payment program or forgiveness program. So if somebody is trying to tell you that you need to pay a fee to enroll an income-driven repayment or in public service loan forgiveness or another program offered by the federal government for your student loans, that is a scam and you could call your servicer and they do all those things for free. If you have a new servicer, there's a few things I would do. One, and this may be goes for everybody too, is just make sure that your contact information is up to date on the Department of Education's website and up to date with your servicer because they're going to be sending you emails and mail and all that. Another thing I would do is if you do think that you're going to need a different payment plan than what you were using before the pandemic, I would just get in touch with your servicer now. Servicers will be facing a crush of calls when payments resume. It makes sense. As soon as everybody gets that student loan bill, many people will be anxious about how to pay it and they're going to call up. So anything you can do before that will help.

Stephanie Kelton: Borrowers aren't the only ones who are concerned about the impact of payments resuming.

Jillian Berman: When payments resume, economists, officials, policy makers are all expecting a little bit of an economic hit and definitely a hit to borrowers wallets. So part of the argument that the Biden administration made in saying that we need to do the debt relief plan is that without mass student loan forgiveness, when payments resume, there could be a wave of delinquency and defaults because borrowers will struggle to pay their bills. So that's something that the Biden administration still believes to be true, for state and from CFEB, about how borrowers are struggling with some other debts and things like that. So there is reason to believe that when payments resume, borrowers will have a tough time fitting that into their budget. An economist I spoke to a while back said basically this is going to be like a tax increase for a lot of people because it's something they have to pay, but they're not getting anything from it. He said it was analogous to a previous tax increase that happened in 2013, and the impact of that was the economy did slow for a period of time. Another thing too, and whether this actually trickles out into the macro economy, is that for borrowers personally, we saw that the payment pause allowed them to put money towards other things that they hadn't been able to afford before. So for example, people saved for homes, people paid down other debts, things like that. And that behavior, obviously, we expect to stop when payments for resume. And the new income driven repayment plans, they will help lower monthly bills a bit, so borrowers who use it may have a little more room in their budget than before the pandemic when they were paying their student loans. But still, I think it is expected to be hard for a lot of people and that will have broader economic consequences.

James Rogers: As student debt cancellation continues to spark debate, Jillian says there's one thing that both sides are aligned on.

Jillian Berman: Both supporters and critics of mass student debt cancellation say that it doesn't address the front-end issue of college costs. So college costs have gone up and up and up. That's one of the reasons why borrowers are taking out more loans. Others have to do with pressure for more credentials, things like that. But addressing that front-end problem of college costs going up is something that there is, under the purview of Congress. Say they wanted to create some kind of national pre college program, that would be something that only Congress would be able to do. Another option is in individual states, they take steps to make the public colleges and their states more affordable and on and off, states take a stab at that. So those are some of the front-end things that need to be done to make sure that borrowers can afford college without debt or as much debt going forward, but they take a lot of political will, and it's in short supply right now.

James Rogers: For now, we'll just have to wait for the particulars of the Biden Administration's new plan to be decided on, to know what the future of student loans might look like.

Jillian Berman: We don't know what the contours of that are, so we don't know at this point how many people are going to be eligible. Biden administration officials have said they want to have the relief available to as many people as possible, but the contours of the actual relief plan will, in some ways, be shaped by the process of coming up with a plan. So through this process called negotiated rulemaking where they can meet stakeholders who discuss all of this, that will help to shape the new debt relief plan, so too early to say what exactly it will look like.

Stephanie Kelton: Thanks for listening to The Best New Ideas in Money. You can subscribe to the show wherever you get your podcasts. If you like what you heard, please leave us a rating or review. And if you have ideas for future episodes, drop us a line at bestnewideasinmoney@marketwatch.com. Thanks to Jillian Berman. To learn more about new ideas in student debt forgiveness, head to marketwatch.com. I'm Stephanie Kelton.

James Rogers: And I'm James Rogers. The Best New Ideas in Money is a podcast from MarketWatch. The producers are Michael McDowell Mette Lutzhoft and Katie Ferguson, who also mixed this episode. Melissa Haggerty is the executive producer. Steven Kurtz was our newsroom editor on this episode. The Best New Ideas in Money theme was composed by Sam Retzer. Stephanie Kelton is an economist and a professor of economics and public policy at Stony Brook University and not part of the MarketWatch newsroom. We'll be back next week with another new idea.