On April 2, FREOPP hosted a public event entitled Making Sense of Student Loan Cancellation, in which I walked attendees through the myriad student loan cancellation initiatives that the Biden administration has pursued without explicit Congressional mandate. This post recaps the information shared during that presentation.

President Biden’s one-time student loan cancellation plan met its end at the hands of the Supreme Court, which struck down the scheme as illegal in June 2023. But as President Biden said later, “The Supreme Court blocked it. They blocked it. But that didn’t stop me.”

The Biden administration has enacted several other loan cancellation initiatives, largely without express Congressional authorization, while additional initiatives are still in the works. Some of these programs—such as the administration’s new income-driven repayment SAVE plan—are relatively high-profile. Other initiatives have flown under the radar, but are still consequential. Taken together, the cost of the administration’s loan-cancellation plans could reach one trillion dollars.

Brief descriptions of the administration's various loan cancellation programs follow, along with analysis and estimated costs. I have arranged the programs in rough order of profile, starting with the most widely-known.

The SAVE plan

The Saving on a Valuable Education (SAVE) plan is an income-driven repayment (IDR) plan, which allows borrowers to make payments based on their income. SAVE is the most generous IDR plan ever created. It sets loan payment for undergraduates at five percent of income above 225 percent of the federal poverty line and forgives any remaining balances after 10 to 20 years, with lower-balance borrowers receiving forgiveness sooner. Single borrowers earning less than $34,000 or and borrowers in a family of four earning less than $70,000 pay nothing towards their loans.

The Department of Education announced the SAVE plan in August 2022 and is implementing it in stages. The most generous provision—raising the zero-payment threshold from 150 percent to 225 percent of the federal poverty line—has already taken effect, with other provisions slated to go into effect this summer.

The Biden administration estimates that SAVE will cost taxpayers $156 billion, but independent analysts largely agree that cost estimate is too low. The Penn Wharton Budget Model figures the cost at $475 billion. Those estimates incorporate the likelihood that SAVE will induce more students to borrow, and more borrowers to choose the SAVE plan.

Early indications suggest the plan could be costly. As of February 2024, nearly eight million borrowers were enrolled in SAVE, and more than half had a $0 monthly payment. The administration has also fully canceled the debts of 153,000 borrowers under SAVE, to the tune of $1.2 billion—but it’s likely much more forgiveness is coming.

The SAVE plan is technically within the letter of the law, which authorizes the U.S. Department of Education (ED) to create IDR plans but does not specify their terms. However, the original framers of that law likely never intended the statute to authorize an IDR plan so costly. Kansas and several other states recently filed a lawsuit challenging SAVE on these grounds.

Loan relief negotiated rulemaking

Between October 2023 and February 2024, ED convened negotiated rulemaking sessions to develop a successor program to the loan cancellation scheme that the Supreme Court struck down. ED will formally propose this new “Plan B” loan cancellation program in the coming weeks. However, draft regulatory text considered during the rulemaking sessions is public, so we have a decent idea of what this proposal will look like. 

The program would allow the secretary of education to cancel debt for borrowers he expects to default on their loans because they are “experiencing hardship.” But the definition of “hardship” is vague; the secretary is allowed to consider over a dozen factors, which feed into a black-box model that renders cancellation decisions. Unlike the original cancellation plan, this relief program would apply to new loans as well as old.

The draft text would also allow loan cancellation for borrowers who have seen their balances rise, those who have been paying their loans for two decades or more, and those whose schools were kicked out of the federal student loan program for poor outcomes.

The nebulous “hardship” standard would give the secretary broad authority to cancel student debt at their discretion. By my own estimate, some of the factors signifying hardship could cover over 70 percent of college students. Moreover, as one measure of hardship is repayment history, the hardship standard could create moral hazard, since those who fall behind on their loans could see them canceled. Finally, there is no way to assess whether the “hardship” standard is a reliable indicator of default, as borrowers cannot default on canceled loans.

No cost estimates yet exist, as the rule has not yet been formally proposed. But as a reference point, the cost of the Biden administration’s “Plan A” mass-cancellation plan was $400 billion, according to the Congressional Budget Office. Though Plan B is not as universal as Plan A, it is also an ongoing loan-relief program as opposed to one-time. This could increase its long-run cost.

Payment pause, on-ramp, and Fresh Start

At the start of the COVID-19 pandemic in March 2020, Congress authorized a temporary pause on student loan payments. The Biden administration inherited this pause and extended by executive action a total of six times, until Congress finally forced it to restart payments in October 2023. The payment pause lasted three and a half years in total.

To aid the transition back into repayment, ED created an “on-ramp” period during which borrowers who miss payments will not enter default, nor see their credit scores suffer. The on-ramp expires at the end of September 2024. In addition, ED created the “Fresh Start” program, which gives borrowers who were in default before the pause began a one-time chance to get out of default.

The Biden administration’s extensions of the student loan payment pause cost taxpayers $258 billion in foregone interest and other benefits. There are warning signs that the effects of the pause will linger: 40 percent of borrowers missed their first loan payment when it was due in October. (More recent data are not yet available.)

The on-ramp and Fresh Start programs are reasonable, given the disruption that the payment pause introduced into borrowers’ financial lives. However, there is a danger that ED extends the on-ramp indefinitely, creating a payment pause in all but name. Moreover, Fresh Start could allow former defaulters to borrow more student loans with no demonstration of ability to repay, which could lead to re-defaults and more headaches for taxpayers.

Public Service Loan Forgiveness (PSLF) waiver

Congress created PSLF to let borrowers in government and nonprofit “public service” jobs receive loan forgiveness after making ten years’ worth of payments towards their loans. However, the law requires PSLF recipients to hold Direct Loans and repay them under an IDR plan. Many borrowers who unknowingly did not meet those conditions were frustrated when the government denied them loan forgiveness under PSLF.

In October 2021, the Biden administration created a temporary waiver that allows borrowers with any loan type, using any repayment plan, to receive credit towards PSLF. While the waiver expired in October 2022, it resulted in immediate loan cancellation for hundreds of thousands of borrowers, while moving millions closer to forgiveness.

A limited waiver to help public-service workers who should have qualified for PSLF makes some sense: after all, many of these borrowers could have qualified if they had known years ago to convert their debts to Direct Loans and choose the correct repayment plan. However, the Biden administration’s changes were so broad that they allowed high-income borrowers who would have been ineligible for PSLF to receive loan cancellation anyway.

To date, the PSLF waiver has led to $57 billion in forgiveness for 793,000 borrowers, with more to come. Over two million borrowers are working towards PSLF, with an aggregate loan balance of $182 billion. Moreover, the SAVE plan will make PSLF much more costly, since it reduces borrowers’ payments and thereby increases the amount forgiven.

IDR payment count adjustment

In 2022, the Government Accountability Office determined that ED had not properly tracked payments for borrowers working towards loan cancellation under IDR. (Borrowers typically need 20 or 25 years’ worth of qualifying payments under IDR to receive forgiveness.)

In response, ED implemented a “one-time account adjustment” that gave borrowers credit toward forgiveness for certain periods in which they were not making qualifying payments, including periods that they were in forbearance, and thus not making payments at all. Borrowers who benefit from the IDR waiver will receive loan forgiveness if they have been in repayment for 20 to 25 years, even if they were not in an IDR plan for all or most of that time.

The policy in essence moved millions of borrowers closer to the cancellation threshold, wiping out years of potential payments. Nearly four million borrowers moved at least three years closer to forgiveness. One group that benefited especially was professionals with advanced degrees who paid their loans on long-term plans; many will have their last five years of payments lopped off.

The payment count adjustment immediately canceled $39 billion worth of debt for 804,000 borrowers; around $1 billion more is being canceled every month.

In July 2023, ED implemented new regulations to expand several existing loan cancellation programs. These include borrower defense to repayment, which allows students defrauded by their institutions to have their loans canceled; closed school discharges, which cancel the debts of borrowers who attended an institution that shuttered; and total and permanent disability discharges, which cancel debts for borrowers with disabilities.

While Congress authorized these loan cancellation programs, it left many of the details vague. Successive administrations have broadened or narrowed the window for loan cancellation under these authorities. The Biden administration largely made them more generous, for instance allowing students to claim “aggressive and deceptive recruitment” as a basis for fraud discharges under borrower defense.

Courts partially blocked the new regulation in August 2023, including the borrower defense provisions. Litigation remains ongoing. Meanwhile, the Biden administration can continue to forgive loans via borrower defense and other channels using its existing authority.

ED estimates the regulation will cost taxpayers $72 billion over ten years; however, there is so much uncertainty in projecting cancellation rates under these programs that it is possible the true cost will be much higher. While ED may attempt to recover the cost of discharged loans from schools, in practice this rarely happens.

Discretionary loan cancellations

The Biden administration has frequently canceled debt for certain groups of borrowers, with tenuous justification. In August 2021, ED canceled $1.5 billion for borrowers who attended the now-defunct ITT Technical Institute, even if they didn’t technically qualify for a closed school discharge. In June 2022, ED canceled $5.8 billion for all borrowers who attended Corinthian Colleges, which closed in 2015 amid fraud investigations), even if the borrowers did not submit a borrower defense claim.

There have been several additional actions in this vein. While some of these actions are perfectly legal under existing laws and regulations, others stretch the statutory and regulatory authority the administration possesses. However, officials have largely been able to get away with overbroad actions.

The Biden adminstration’s discretionary cancellations have totaled $34 billion, though it is possible that some of that debt would not have been repaid anyway. While ED has some authority to recoup the forgiven amounts from schools, this rarely happens in practice because most of the schools have closed. Courts also blocked one attempt to recoup part of a $72 million discharge for former students at DeVry University, which remains open.

Summing it all up

The Biden administration has canceled of student $138 billion of debt as of March 2024, including cancellations through the PSLF waiver ($57 billion), the IDR payment account adjustment ($46 billion), discretionary loan cancellations ($34 billion), and the SAVE plan ($1 billion). That figure does not include $258 billion effectively canceled through extensions of the student loan payment pause.

The cost of expected loan cancellations is much greater. The SAVE plan could cost taxpayers $475 billion. The loan relief negotiated rulemaking’s cost is indeterminate, but a potential benchmark is $400 billion. Changes to borrower defense and related programs could cost $72 billion or more. The PSLF waiver and IDR payment count adjustment will also carry indeterminate future costs.

Taken together, the costs of these loan-relief programs could potentially exceed $1 trillion. For context, that is 30 times the U.S. government’s annual spending on Pell Grants.

Potential policy remedies

The College Cost Reduction Act, introduced by Representative Virginia Foxx (R., N.C.), would prohibit the secretary of education from issuing new regulations or executive actions related to student loans that significantly increase costs to taxpayers. The legislation would also codify a less costly version of IDR and require colleges to chip in for the costs of providing borrowers with repayment assistance.

Legal challenges to various aspects of the administration’s loan-cancellation program remain ongoing. However, these challenges need to overcome a key hurdle: establishing standing, or showing that a party to the lawsuit has suffered financial harm because of the loan-cancellation initiative. (General harm to taxpayers doesn’t count.) As a result, these legal efforts face an uphill battle.

Ultimately, it falls to Congress to design a more rational student loan system with fewer openings for rogue executive-branch agencies to exploit. Perhaps a Congressional reassertion of authority of federal student loans will be the end result of the Biden administration’s debt-cancellation schemes—even if that was not the administration’s intent.