The Daily - The Complicated Future of Student Loans

Episode Date: July 7, 2023

Last week, the Supreme Court struck down President Biden’s sweeping plan to cancel billions of dollars in student loan debt.Stacy Cowley, a finance reporter for The New York Times, explains what the decision means for borrowers now facing their first payments since a coronavirus pandemic-related pause and how an alternative plan could still ease their burden.Guest: Stacy Cowley, a finance correspondent for The New York Times.Background reading: The proposed debt cancellation of more than $400 billion would have been one of the most expensive executive actions in U.S. history.Millions will now have to repay debts that the Biden administration had promised to eliminate.For more information on today’s episode, visit nytimes.com/thedaily. Transcripts of each episode will be made available by the next workday.

From The New York Times, I'm Natalie Kittroweth, in for Michael Barbaro. This is The Daily. Last Friday, the Supreme Court struck down President Biden's sweeping plan to cancel billions of dollars in student loan debt. Today, my colleague Stacey Cowley on what the court's decision means for borrowers now facing their first payments since the pandemic, and how an alternative plan could still ease their burden. It's Friday, July 7th. Stacey, welcome back.

And Natalie, welcome back. You're guest hosting again. Yes, imagine my surprise. The last time I was guest hosting The Daily, there was big student loan news. And now here I am back with you to talk about more student loan news. It's a wonky but fun duo act we have going. So last time you and I spoke about President Biden's plan to forgive billions of dollars in student debt. That was a plan that had generated a lot of controversy. And now, just last week, the Supreme Court struck it down.

Remind me how that issue got to the Supreme Court. What was Biden trying to do? So the problem the president was trying to tackle here was the issue of crippling student loan debt. Over the past roughly two decades, the cost of crippling student loan debt. Over the past roughly two decades, the cost of higher education has completely soared. Student debt loads have roughly tripled in the past 20 years. For many people, their student loan bill is the biggest monthly bill in their lives now. More than 45 million people owe the federal government money for their student loans, and they owe a total of $1.6 trillion. That eclipses all other consumer debts other than mortgages. For many people, it's bigger than their rent bill, bigger than their car payments, bigger than their credit

cards, bigger than any other bill that they're paying. So back in March 2020, as a pandemic emergency measure, President Donald Trump approved a timeout. The idea was that people were under huge financial stress because of the pandemic. Lots of people were losing their jobs. And to give people more breathing room, they decided that this would be put on pause, that no one would have to pay their federal student loan bills for some period of time. What ended up happening is those pauses just kept being extended over and over again. President Trump continued them throughout his entire administration. As soon as President

Biden took office on his very first day in office, he extended the pause and that just kept going and going and going. Meaning anyone who owed the government money for their education didn't have to make a single payment on that debt during the pause. Right. And for many people, this was an enormous change. I mean, certainly for people who lost their jobs, this was a very helpful temporary measure to tide them over. But also for people who did keep their jobs, this just changed their household finances completely. I was speaking recently with one borrower. His name is Victor. He lives right outside the Denver area. And he and his wife had been paying over $1,000 a month for their student loans.

Once that went away, they looked at each other and said, we can afford to use that money to buy a house. So in June 2020, they were able to buy their first home together. Wow. But this time out was always intended to be temporary. And the law Biden was using to do it in particular relied upon the education secretary being able to do this in a time of national emergency. It's pretty hard to make the case that the coronavirus is still a national emergency. So this was going to have to, as much as this temporary extension went on and on as long as it did, it was going to at some point

have to end. And part of the problem the administration was facing, why they didn't want to just pick back up exactly where we were before the pandemic, is this is a system that had been pretty badly broken for years. Lots of people had been falling into default. A lot of people have been struggling with bills they could not afford to pay before the pandemic. So the solution the Biden administration came to was to say, if we're going to restart this, let's try to really fix it. Let's do something big and dramatic. My campaign for president, I made a commitment. I made a commitment that would provide student debt relief. And I'm honoring that commitment today. And that big dramatic thing was the debt cancellation plan we discussed last summer. Right, exactly.

With today's announcement, the government is forgiving $10,000 in federal loans for anyone earning less than $125,000 a year. And canceling up to $20,000 in student loans for those who receive Pell Grants. This is something that progressive activists in particular had been pushing for for many years, this idea that pretty much everyone who had a federal student loan debt would get some chunk of it written off and forgiven. People can start, finally crawl out from under that mountain of debt to get on top of their rent and their utilities, to finally think about buying a home or starting a family

or starting a business. So what this plan did collectively was it targeted a lot of the relief to low-income families and to non-white borrowers. So for borrowers of color in particular, this was going to be a pretty major financial windfall. Right. I remember this was going to cost a lot of money, right? But it could potentially help a ton of people. Yeah. The price tag on this was over $400 billion. So it would have been one of the most expensive executive actions in American history. But it would also have helped quite a few people. The estimate was that up to 40 million people were going to be eligible for some level of debt cancellation.

And that around 20 million would have seen their entire student loan balance wiped out. Wow. But there was also a real problem with this, in that it quickly became a political lightning rod. No one's paying off Arkansas farmers' tractor loans. No one's paying off their small business loans. No one's paying off their mortgage. Republicans had some real political pushback around the idea of

why should people who have paid off their loans subsidize had some real political pushback around the idea of why should people who have paid off their loans subsidize those who haven't? Is this just a big giveaway to this educated class of borrowers? Senator Mitch McConnell calling it a slap in the face to every family who sacrificed to save for college, every graduate who paid their debt. And also it became a big legal issue and that this was a $400 billion program. And Biden was really swinging on this one in terms of the legal standing to do it. So that's where the court challenges arose.

A group of Republican-led states came together and sued to stop this. And what was the argument behind that lawsuit? The core challenge to what Biden had done legally was that the law that Biden had used to do this, an act called the Heroes Act, didn't give him this power. That law gave the secretary of education the ability to waive or modify student loan debt. The argument the states made was that doesn't translate to the ability to unilaterally wipe out billions and billions of dollars worth of student loan debt. The suit saying that Biden needed to consult Congress to do something this big. The suit was directly saying that, that Congress controls the power of the purse, that if you're going to cancel hundreds of billions of dollars in student loans, that needs to be a decision Congress clearly makes, that the president does not have the sole authority to do it. Right. So as this lawsuit made its way through the court

system, Biden was forced to put the entire student debt forgiveness program on hold. Literally at the last second, as they're right about to start canceling debt for tens of millions of people who've applied for this program, they hit pause, freeze the program, and wait for the court challenges to work their way through up to the Supreme Court. And so last Friday, we get a decision from the court. Yes. And the court sides with the states in this case. The court majority says pretty clearly that they agree that the president does not have the power under this law to do this, and that if this level of debt cancellation is going to occur, it has to be a decision made by Congress. So basically, this is the Supreme Court saying that for now, mass student debt cancellation is off the table. Yes. And also, this was the Supreme

Court saying this pretty definitively, that this is not something this president or any president is going to be able to do unilaterally. I think this decision did very firmly kick this issue back to Congress and make it clear that if anything of this scale is going to happen, it's going to have to be done by Congress. And the reason that hasn't happened is that Congress simply hasn't had the votes to do it. Even when Democrats controlled both chambers, the Senate didn't have the votes to pass it. And certainly now that the Republicans control the House, there's really no prospect in the near future of Congress taking this up. So what was the reaction to the decision? It was not entirely shock, to be honest. This is a conservative court, and people were kind

of braced for this decision. But certainly it was a gut punch for a lot of people. There are people who were really relying on this to get rid of a debt that had haunted them in some cases for decades. And this is especially coming at a fraught time for people because in October, these payments resume. So people are being told not only are you not going to get this cancellation, but in just a couple of months, you're going to have to start sending in checks again. So this moment feels like a pretty big setback for Biden. I mean, eliminating student debt was one of his big campaign promises, right? And it's hugely popular with his base, especially younger people. The Supreme Court blocks it right before people

are going to have to start repaying the debt. Yes. I mean, this was a huge blow for Biden. This had become one of his signature efforts. This was something that was really important to tens of millions of people. Let me begin by saying I know there are millions of Americans, millions of Americans in this country who feel disappointed and discouraged or even a little bit angry about the course decision today on student debt. So Biden gives a press conference at the White House on Friday attacking this decision. Republican elected officials and special interests stepped in. They said no, no. And really firmly pointed the finger back at the Supreme Court and the Republicans. You know, these Republican officials just couldn't bear the thought of providing relief for working class, middle class Americans.

He said over and over that this was the Republican Party choosing to try to block this. I believe the court's decision to strike down my student debt relief program was a mistake, was wrong. And that this was the Supreme Court doing what he thought was a misinterpretation of the law. that this was the Supreme Court doing what he thought was a misinterpretation of the law. But wasn't it always kind of a moonshot to try to cancel federal student loan debt? I mean, I'm sure for people who have a bunch of debt, it sounds great. But it also just seems like it might have been unlikely from the beginning. Yes, this was always, as you said, a moonshot and kind of a gamble. And there was always the chance that it

was going to get blocked. We need to find a new way. And we're moving as fast as we can. But the reality is that while this was pretty important, it was only one piece of a larger plan for overhauling the student loan system. Today's decision has closed one path. Now we're going to pursue another. And the other elements of that plan are still going ahead. We'll be right back. Stacey, before the break, you said there were these other elements of debt relief that were on the way. What are those? So debt cancellation was the biggest and flashiest and simplest piece

of President Biden's plan. But there's a whole bunch of other elements of this plan that are still prepared to move forward that the Supreme Court hasn't touched. And again, the biggest one there is going to affect for millions of people how much they actually pay on their loans. What Biden has been planning since late last year is a new payment plan for those who are on income-driven payments. What's that? So there's several different ways you can pay your student loan bill. The default plan is that you just pay it in chunks over the course of 10 years. And if you can make that number, great. But a lot of people can't afford that number. So the government instead offers what's called income-based repayment plans, where the amount you owe each month is directly tied to your income. Meaning monthly payments are a function of a borrower's income. If you make less, you owe less.

If you make more, you owe more every month. Yes, exactly. And what the Biden administration has done here is designed a completely new income-driven plan that's very different than the ones we've seen before. How so? The biggest pieces of this is those two really dramatic things. The first is that it would cap the amount that you owe for undergraduate loans at no more than 5% of your income. What your income is, is calculated through a slightly complicated formula that exempts a certain amount below

the poverty line. But basically, they're looking at what's called your discretionary income. And under the existing payment plans, you owe up to 10% of that amount to pay off your loans. This cuts it to 5%. That right there means that millions of people are going to see their monthly student loan bill cut in half. That seems pretty significant. Yes, it definitely is, especially when paired with the second change that's in this new program, which is that interest will not accrue for people who are making their monthly payments. That is an enormous change in how student loans operate. What's been really frustrating for many people over the years is that these interest payments

can often eclipse what you're paying on your monthly bill. Every penny you send in is being used to pay down interest and your debt actually isn't decreasing. I talked to a gentleman named Claude Reed who took out $3,300 in loans back in the early 70s. He's been making payments since then. He's paid over $9,000 on his loans over the years. But with interest and fees, the balance keeps going up. So right now, he still owes $4,600, more than he borrowed originally. And for many borrowers, that's an incredibly frustrating and common experience to feel like they're throwing this money at payments every month and the number on their bill just keeps rising. And what this plan says is for the first time, if you are sending in your payment each month, that money is going to go straight

towards decreasing your balance. That's going to be a huge psychological change for people because one of the biggest barriers with student loans is this sense of I'm throwing money at this every month and it keeps going up. I'm not making any progress. This will change that. Okay, so now for people like Claude Reed, what you're saying is that the amount they owe every month is not going to get bigger as long as they stay current on their payments. Yes. And there's one more thing here, which is that it's always been possible to qualify for a $0 monthly payment. If your income is very low, you can qualify to not have to make a monthly payment. This new plan tinkers with the formula there a bit and expands the group of people who are going to qualify for that. That's going to have a big impact for people on the lowest end of the income spectrum. Certainly anyone making minimum wage

is going to qualify for this $0 monthly payment. And this is intended both to help those borrowers and also to help the government a bit. It wants these people to stop falling into default. It wants these people to have an easier pathway to remain current on their loans. So by expanding the group of people who are going to qualify for no payment because they just don't have the income to really make any payments, that's intended to really be a benefit for a growing number of people. So just to recap, under the new plan, for many borrowers, their monthly payments will be cut in half. We're also going to see that overall debts won't get bigger with ballooning

interests. And then for more borrowers who are in a really tough situation, maybe they've lost their job or they don't earn all that much money to start with, they will not have to make monthly payments at all. Yes. Cumulatively, that's going to be a really big set of changes for the student loan system. And this is all coming and being done quite deliberately at a fairly critical time for the system because October is when payments restart. So for borrowers who for more than three years now have not had to be making their payments, they're now going to have to start doing that again. And this is all intended to be kind of a reset to make that transition easier. There's a few other things happening

there as well. One of the big ones is that the administration said last week that for the first 12 months, borrowers who are late on their payments or fall behind on them and don't make them won't be reported to credit bureaus. So they're trying to kind of cushion the transition and soften the blow and give people time to get back to this idea of having this bill be part of their lives again. And Stacey, given what happened to Biden's last big attempt to rein in student debt, the last big, sweepy effort, how do we know that this part of the plan is actually going to happen?

It's an excellent question. On this one, the administration has said that they thought their authority to do this was crystal clear and that they would be surprised if there was legal challenges. And it is true that the law does give the education secretary the authority to design these repayment plans. The education secretary has been doing that for decades. And this does seem to be on firmer ground as something that is a typical act that the education department can go forth and do.

Stacey, as you're describing all these changes, it strikes me that they're a pretty big deal, right? But they don't have the emotional power of what we thought was going to happen, of getting rid of $20,000 of debt for a borrower overnight. And I guess I just, I wonder if these changes, as impactful as they may be, will feel transformative to people on an individual level. Yes, I think that's exactly right. The emotional element of this is going to be really challenging. The reality is that this will be a very different student loan system than it was before the pandemic. People's monthly bills are going to look very different. In many cases, they're going to be smaller. But we're also still

going back to a world where after three years of having a $0 student loan payment, people are going to have to start once again paying hundreds or thousands of dollars a month on these debts. And there's no way for that to happen without it feeling pretty unpleasant for people. Right. And one of the upshots of the way this all played out was that people feel like something got snatched away. You know, people were promised this big debt relief, which would have been a big, exciting, very easy to understand thing.

And instead, that's gone. And now we're left with going back into a more efficient, more affordable, but still, ultimately, it's a debt collection system. ultimately, it's a debt collection system. So even though the world in October, as we reenter these debt payments, is going to be better for a lot of people, it's still not necessarily going to feel better. For a lot of people, there's just going to be this heavy sense of, I once again have to pick up and start paying this big crushing debt. Stacey, thank you so much.

Thanks, Natalie. We'll be right back. Here's what else you need to know today. Thank you. as Yellen attempts to ease years of distrust between the U.S. and China. Both countries have continued to erect new barriers to trade and investment, particularly after the U.S. began blocking China's access to sensitive technology, such as semiconductors, last year. And for the first time in two decades, the federal government gave an Alzheimer's drug full approval. The drug, Lekembe, has been shown to modestly slow cognitive decline in the early stages of the disease. And Medicare, the federal health insurance program for older Americans, said it would cover much of its high cost, laying the foundation for the drug's widespread use.

laying the foundation for the drug's widespread use. Data from a large clinical trial showed that the drug may slow decline by about five months over an 18-month period for people with mild symptoms, but that it also carries significant safety risks. Today's episode was produced by Claire Tennesketter, Will Reed, and Mary Wilson. It was edited by Devin Taylor and Mark George, with help from Lisa Chow. Contains original music by Marion Lozano and Rowan Nemisto, and was engineered by Chris Wood. Our theme music is by Jim Brunberg and Ben Landsberg of Wonderly. Landsberg of Wonderly.

The Daily is made by Rachel Quester, Lindsay Garrison, Claire Tennesketter, Paige Cowett, Michael Simon Johnson, Brad Fisher, Chris Wood, Jessica Chung, Stella Tan, Alexandra Lee Young, Lisa Chow, Eric Krupke, Mark George, Luke Vander Ploeg, M.J. Davis-Lynn, Dan Powell, Sydney Harper, Michael Benoit, Liz O. Balin, Aastha Chaturvedi, Rochelle Banja, Diana Nguyen, Marion Lozano, Corey Schreppel, Rob Zipko, Alishaba Itupup, Muj Zaydi, Patricia Willans, Rowan Nemisto, Jodi Becker, Ricky Nowetzki,

John Ketchum, Nina Feldman, Will Reed, Carlos Prieto, Ben Calhoun, Susan Lee, Lexi Diao, Mary Wilson, Alex Stern, Dan Farrell, Sophia Landman, Shannon Lin, Diane Wong, Devin Taylor, Special thanks to Chablani, Des Ibequa, Elizabeth Davis-Morer, Jeffrey Miranda, Renan Barelli, Maddie Messie-Yellow, Isabella Anderson, and Nina Lassam. That's it for The Daily. I'm Natalie Kittroweth. See you on Monday.