Student Loan Forgiveness and the Payment Pause: What’s New
By: Walecia Konrad · January 04, 2022 · Reading Time: 8 minutes
Millions of student loan borrowers are currently in limbo as the Biden administration fights legal challenges claiming the federal student debt relief program is illegal or unconstitutional.
The plan, announced in August, would forgive up to $10,000 in federal student loans for borrowers whose income is less than $125,000 and an additional $10,000 if they received a Pell Grant while in school. Almost immediately after the announcement, opponents of the plan filed several lawsuits. One of the arguments is that the President does not have the authority to forgive student debt.
Here’s what you need to know about the challenges facing student debt relief and what to expect in the near future. We’ll update this article regularly as developments happen.
What’s Going On With Federal Student Loan Forgiveness?
Since Biden announced his federal student loan forgiveness plan in August, there have been a dizzying series of court rulings. Some dismissed lawsuits and upheld the plan. Others halted the program while the challenges make their way through the legal process.
The latest ruling (by a Fort Worth, Texas, U.S. District judge) forced the Department of Education (DOE) to discontinue accepting forgiveness applications and to close its loan cancellation portal. Up to that point, more than 26 million borrowers had applied for forgiveness and 16 million applications had been approved.
In response to the freeze, the Biden administration filed an appeal to allow the student loan forgiveness plan to go forward. On Nov. 30, the federal appeals court rejected the request. The Biden administration then turned to the Supreme Court, which has agreed to hear arguments in February. While waiting for the courts to determine the future of the forgiveness plan, the President announced in late November that the administration will extend the federal student loan payment pause into 2023.
Court Challenges Still in Play
Of the many lawsuits brought against debt forgiveness, two have been at the center of recent activity. Here’s a closer look at both.
The Texas Lawsuit
In Texas, a conservative small-business trade group backed a lawsuit brought in the U.S. District Court for the Northern District of Texas on behalf of two borrowers who did not qualify for the maximum amount of forgiveness under Biden’s plan.
One borrower had not received any Pell Grants, so did not qualify for the maximum $20,000 in debt forgiveness. The other borrower holds federal loans, but they are a type that does not qualify for forgiveness under the plan.
Judge Mark Pittman, an appointee of President Trump, ruled that President Biden did not have “clear congressional authorization” to implement the student loan forgiveness program, calling the plan “irrational, arbitrary, and unfair.”
In the wake of the ruling, the Justice Department immediately appealed to the U.S. Court of Appeals for the Fifth Circuit, and the DOE stopped accepting applications on its StudentAid website. As noted earlier, the federal appeals court has rejected the Biden administration’s request to pause the Texas court’s decision. The Justice Department’s appeal is now with the Supreme Court, which has said it will hear arguments beginning in February.
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Legal Action From Six States
Meanwhile, the DOE had already temporarily suspended the processing of forgiveness applications after three judges from the U.S. Court of Appeals in St. Louis placed a hold on the forgiveness program.
Leading up to the suspension, six states — Nebraska, Missouri, Arkansas, Iowa, Kansas, and South Carolina — had filed a lawsuit arguing that the federal student loan forgiveness plan was unconstitutional and that the states would be harmed by the program because it would eliminate future tax revenue.
When debt is canceled, it is typically taxed as income. Last year Congress exempted any student debt forgiven by the end of 2025 from being federally taxed. The states claimed that debt forgiveness, by reducing the amount of debt owed, therefore reduced future state-tax income.
The district court judge dismissed the suit, ruling that the states didn’t have standing, meaning plaintiffs were unable to show they were directly harmed by the plan.
The states appealed to the 8th Circuit Court. On Nov. 14, those judges ruled the states do have standing. They granted an injunction to halt the debt relief plan, which the states had requested.
On Nov. 18, the Justice Department (DOJ) asked the Supreme Court to reverse the 8th Circuit Court decision and allow the plan to move forward. The Supreme Court declined to lift the injunction, but as noted earlier, it has agreed to hear the appeal beginning in February.
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The Arizona state attorney general has filed a lawsuit against the forgiveness program, claiming it is unconstitutional and fundamentally unfair. The suit claims the attorney general’s office has standing to sue because it relies on loan forgiveness to recruit employees and forgiveness would impede that incentive.
The Cato Institute, a think tank, is also suing the DOE, challenging the legality of the forgiveness program. The libertarian organization claims it has standing because the Biden plan will undermine the Public Service Loan Forgiveness program and make it harder for nonprofits like Cato to attract workers.
Court Challenges That Have Been Thrown Out
Several lower courts have dismissed cases against the debt forgiveness plan. In many cases the courts have ruled that plaintiffs do not have standing, a legal term explained above.
Perhaps the most notable dismissals are the two that Supreme Court Justice Amy Coney Barrett rejected. She dismissed a case brought by a taxpayers’ association in Wisconsin and another from borrowers in Indiana. Both suits claimed taxpayers would be harmed because forgiveness would impact their tax burden.
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Why Are People Opposed to Student Loan Forgiveness?
Opponents of the Biden administration’s debt forgiveness program argue that it disproportionately favors high earners and doesn’t address the underlying problem of the high cost of college. Others argue the plan is too expensive.
Most of the legal challenges, however, center around the argument that the President does not have the authority to forgive federal debt. The Biden administration says it does have authority under the Heroes Act of 2003.
Passed in the wake of the 9/11 terrorist attacks, the Higher Education Relief Opportunities for Students Act gives the Secretary of Education the authority to change federal student aid provisions in the event of a war, military operation, or national emergency. The pandemic was declared a national emergency in March 2020.
Many lawmakers opposed to the program argue that the Constitution gives Congress control of government funds. The president and federal agencies may not spend money that has not been appropriated by Congress.
Opponents also point to a recent Supreme Court decision in West Virginia v. Environmental Protection Agency (EPA). That decision ruled that agencies are limited in making decisions that have national significance without guidance from Congress. Student loan forgiveness may be thought of as a decision of national significance.
The Student Loan Payment Pause Extended — Again
As mentioned above, the Biden administration has recently extended the federal student loan payment pause. The pause, which began in March 2020 under the Trump administration, suspended all payments for federal student loans and reduced interest to 0%. It has been extended a total of nine times by two administrations.
In the latest round, the pause was set to end in December 2022, and payments to begin in January 2023. When the Biden administration announced its plans for student loan relief back in August, a careful attempt was made to coordinate forgiveness with the end of the payment pause. That way, borrowers wouldn’t have to begin repayment on loans that would ultimately be forgiven.
Now with the suspension of the forgiveness program, while the government waits to hear from the Supreme Court, the administration has once again extended the payment pause into 2023, possibly as late as 60 days after June 30. The DOE says it will restart payments 60 days after the pending litigation is resolved.
The Supreme Court usually rules on cases in June. If nothing happens sooner than that, payments would then restart 60 days after June 30. That said, according to the latest announcement, payments will resume even if litigation has not been resolved.
What Student Loan Borrowers Can Do Now
The DOE has stopped taking applications for forgiveness on its student aid website. However, you can subscribe to updates on the status of the forgiveness program and the payment pause at the DOE site .
During the pause, the department advises borrowers to make sure their contact information is up-to-date with their loan servicers and to determine whether they qualify for an income-driven repayment plan.
Borrowers who know they have balances above the amount of forgiveness may also want to continue making payments during the pause. That’s because the entire amount will go toward paying down principal instead of interest.
President Biden’s one-time student loan forgiveness plan is on hold until the Supreme Court rules on the legality of the plan. It will begin hearing arguments in February — and usually announces decisions in June. In the meantime, the student loan payment pause, instituted in March 2020, is extended again, into 2023.
Student loan refinancing may help borrowers lower their payments. If your federal debt is more than the amount of forgiveness you are eligible for and you are worried about rising interest rates, you can refinance the amount that will not be canceled. Just know that the refinanced amount will lose access to federal protections and programs, including the payment pause that has been extended into 2023.
Refi with SoFi today to get flexible terms and a competitive low rate before interest rates rise even higher.
Where does the student loan forgiveness plan and the payment pause stand now?
The Department of Education has shut down its portal for forgiveness applications after two court rulings put a temporary halt to the plan. Legal challenges continue to make their way through the courts, with final rulings possible in June 2023. The payment pause has been extended for the ninth time since it began in March 2020. Payments will begin again either 60 days after the litigation is resolved or after June 30.
How long should I expect the student loan payment pause to continue?
That all depends on what happens in the courts. The Department of Education has extended the pause until 60 days after litigation is resolved. The Biden administration has asked the U.S. Supreme Court to review two lower court decisions. Supreme Court decisions usually come in June. The administration has said that even if litigation is not resolved, payments will resume.
What should I do if I’ve been making payments during Covid and requested a refund in order to max out on forgiveness?
The forgiveness plan allows student loan borrowers to receive a refund on any payments made during Covid so that those payments can be considered for debt relief. If you did this, hold onto the refund, perhaps in a high-yield savings account. The money will be there to make payments if the forgiveness plan does not hold up in the courts.
Photo credit: iStock/Goodboy Picture Company
SoFi Student Loan Refinance
If you are looking to refinance federal student loans, please be aware that the White House has announced up to $20,000 of student loan forgiveness for Pell Grant recipients and $10,000 for qualifying borrowers whose student loans are federally held. Additionally, the federal student loan payment pause and interest holiday has been extended beyond December 31, 2022. Please carefully consider these changes before refinancing federally held loans with SoFi, since the amount or portion of your federal student debt that you refinance will no longer qualify for the federal loan payment suspension, interest waiver, or any other current or future benefits applicable to federal loans. If you qualify for federal student loan forgiveness and still wish to refinance, leave unrefinanced the amount you expect to be forgiven to receive your federal benefit.
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Notice: SoFi refinance loans are private loans and do not have the same repayment options that the federal loan program offers such as Income-Driven Repayment plans, including Income-Contingent Repayment or PAYE. SoFi always recommends that you consult a qualified financial advisor to discuss what is best for your unique situation.
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