NerdWallet's Smart Money Podcast - Student Loan Forgiveness Struck Down by Supreme Court. Now What?

Episode Date: June 30, 2023

The Supreme Court has struck down President Biden’s student loan forgiveness plan. Sean and Anna discuss what this means for consumers — including when you can expect payments to resume. To send the Nerds your money questions, call or text the Nerd hotline at 901-730-6373 or email [e-mail].

Well, it's finally here. The Supreme Court released its decision about the Biden administration's debt forgiveness plan. And as you've probably heard, the plan was unforgiven. Disappointing news for many. So in this episode, we'll help you make sense of what it means for your finances. Welcome to NerdWallet's Smart Money Podcast, where you send us your money questions and we answer them with the help of our genius nerds. I'm Sean Piles. In this money news episode of Smart Money, I'm talking with student loans nerd Anna Helhosky about the Supreme Court's decision on the Biden administration's federal student loan cancellation plan and what it means for you. Welcome to Smart Money, Anna. Wish I were here with happier news, Sean. Yeah, likewise. So Anna, I mentioned at the top that the court struck down the administration's big federal loan forgiveness program. It might be helpful to give a quick reminder of how we got to this point. What should folks know? Sure. Biden announced student loan cancellation back in August of last year. That

plan would erase up to $20,000 in federal student loans for more than 40 million eligible borrowers. Applications were ready. And I remember, Sean, you filling yours out in real time on the podcast. I did. That was fun. We were so naive back then. Oh, yes. And then the lawsuit started and the federal government halted all applications. So in December 2022, the Supreme Court said that it would evaluate two major lawsuits that were intending to block the loan cancellation plan. It held its oral arguments for those cases in February. And we've been waiting up until today for justices to craft their opinions and announce a final decision. And now we have it. So that's the backstory.

Can you give us some details about what the court decided in each case? First, the court unanimously said that the first case, Department of Education v. Brown, had no standing. That was pretty much expected. But the second case, Nebraska v. Biden, was the real clincher. That was a case in which six states sued jointly, alleging that relief would harm tax revenue in those states and the finances of certain state-based loan agencies. The court found that at least one of the states, in this case Missouri, had the right to sue. That established the standing for the case. Then the majority of justices said the debt cancellation plan, which was enacted under the

2003 HEROES Act, was unconstitutional. The HEROES Act grants the Secretary of Education the ability to, quote, waive or modify student debt. But in this case, the court said modify does not mean canceling $430 billion of student loan principal. They essentially said this decision would be Congress's to make, but under existing law, it doesn't hold water. All right. So with the judicial jockeying behind us, I also want to ask you about a separate issue, the student loan payment pause that was enacted during the pandemic that is set to conclude this summer. That was initially set for 60 days after June 30th and confirmed by the recent debt ceiling deal. What is that going to look like in practice? Do we have specific dates for this yet? We do. So the Biden administration has worked out what resumption

would actually look like. Interest is going to start accruing on September 1st, and payments will be due starting October 1st. Resuming payments might be pretty difficult for borrowers. A new analysis from the Consumer Financial Protection Bureau said that one in five borrowers could struggle when payments restart. And the note about interest starting to accrue September 1st is really interesting and frustrating for me as someone who paid off all of my interest previously. I will begin to accrue new interest on that date, which makes me pretty frustrated. I'll say that. I'm also thinking about how folks' finances can change a lot in three years.

And people have had all that time to become accustomed to a new budget, one that doesn't include student loan debt. And fitting hundreds of dollars back into your budget is particularly difficult, especially with inflation much higher than it was back when the payment pause started. Having a new payment added to your budget could eat up your take-home pay even more. That's true. And it's going to likely be most challenging for a few different types of borrowers. So for young borrowers who left school in the time since payments paused and never had to make a payment or who had only been making payments for a few months. So that's anyone who left school from 2019 through 2022. And in November, borrowers who left school this year will have to start repaying their debt, too. It could be harder if this is the first time that they've had loans since leaving school and they've already started their lives without having

to make payments. It's also going to be difficult for anyone who's lost a job. Now, unemployment is at an all-time low, but there are some sectors that have seen job losses recently. That includes information and finance. And it could be a confusing time for borrowers whose servicers have changed in the last three years. I'm among these people. The CFPB estimates that more than 14 million borrowers will have a new student loan servicer. It's always tricky when your servicer changes and borrowers will need to get ahead of payments by logging into their new servicer accounts and setting up automatic payments. Now, I don't want to overstate this because for some borrowers, the restart won't be really a heavy lift. They earn enough that they'll be able to

fit loans back into their budgets without too much difficulty. And some have saved what their payments would have been for the last few years. Others have continued paying down their debt and may now have lighter payments too. Well, now let's talk about what folks should do on a practical level. We are recommending that people take a look at their budgets as soon as possible and figure out where student loans might fit in. You might have to reevaluate how you spend your money and reallocate funds for your loans. For me, I know I'm going to be carving a pretty sizable chunk out of my monthly savings to cover this over $400 expense that I'll have again.

And if you forget what your payment is, you can log into your servicing account online. And if you're also not sure who your servicer is, you can log into My Federal Student Aid using your FSA ID to find out. There you'll be able to see who your current servicer is and do all of your loan details. And if you also feel like you're going to have difficulty repaying your debt, it's a good idea to contact your servicer as soon as possible. Ask about your options to lower payments, like enrolling in an income-driven repayment plan. And that's all we have for this episode. If you, listener, have any questions about what student loan payments resuming mean for you and your budget, turn to the nerds and call or text us your questions at 901-730-6373. That's 901-730-NERD. You can also email us at podcast at nerdwallet.com. Visit nerdwallet.com slash podcast for more info on this episode. And remember to follow, rate, and review us wherever you're getting this podcast.

And here's our brief disclaimer. We are not financial or investment advisors. This nerdy info was provided for general educational and entertainment purposes and may not apply to your specific circumstances. And with that said, until next time, turn to the nerds.