3 strategies to help clients with student debt after the Supreme Court's decision

July 12, 2023 6:20 PM

President Joe Biden's executive order on student loan forgiveness was blocked by the Supreme Court in June 2023.

It's been a rough few months for people counting on student debt relief. Since May, two major lifelines for borrowers have been struck down: first the pause on student loan repayments, and then the Biden administration's executive order on forgiveness.

But for Americans struggling to pay off their loans, there are still some solutions available — and financial advisors can help clients make use of them.

"Nobody's wiping out your loans," said Mark Kantrowitz, a student debt expert and author of the book How to Appeal for More College Financial Aid. However, "if you are unable to make payments on your loans, there are still some options for a personal pause," he added.

The national pause, on the other hand, is expiring at the end of August. That freeze on repayments began in March 2020 as a COVID relief measure, and was repeatedly extended by both presidents Donald Trump and Joe Biden. In June 2023, though, when Biden and House Republicans reached a last-minute deal to raise the national debt ceiling, one casualty of the compromise was the pause. The final bill blocked any further extensions without the approval of both houses of Congress — which, to put it mildly, is unlikely.

"For a future payment pause and interest waiver, there would have to be a new catastrophic event, like space aliens landing on the White House lawn or the start of the zombie apocalypse," Kantrowitz said.

Then came the Supreme Court decision. Last August, President Biden signed an executive order forgiving $10,000 in federal student debt per borrower — or $20,000 for Pell Grant recipients — canceling an estimated $430 billion in debt. On June 30, the nation's high court struck down the order by a vote of 6-3, to the dismay of many borrowers and their advisors.

"My clients were disappointed with the results, but not really surprised, given the direction that SCOTUS has been moving in recent times," said Paul Monax, the founder of Agile Wealth in Littleton, Colorado. "All of my clients with current student debt would have benefited from Biden's program."

So where does that leave student debt holders? What choices do they still have? How can wealth managers help them? Here are some of the pathways that still exist to help turn down the pressure on borrowers:

The SAVE plan

Biden is trying again. Immediately after the Supreme Court ruling, the president announced that he was launching a new policy called the Saving on a Valuable Education (SAVE) plan, which the White House described as "the most affordable repayment plan ever created."

Kantrowitz called it something else: a "new version" of an existing policy called REPAYE, which stands for "Revised Pay As You Earn." REPAYE is an income-driven repayment plan that allows borrowers to contribute just 10% of their discretionary income per month, regardless of the size of their debt.

SAVE goes even further, cutting those payments down from 10% to 5% for undergraduate debts. And it also changes the definition of "discretionary income" to anything above 225% of the federal poverty line. The math is complex, but the result is simple: lower monthly payments for low-income borrowers, or in some cases no payments at all.

"That's a pretty significant increase in the amount that will be sheltered," Kantrowitz said. "What it means is that if your income is less than 225% of the poverty line, your monthly payment will be zero."

Not only that, but SAVE blocks unpaid interest from adding to a borrower's balance — a feature that some advisors consider too good to pass up.

"Anyone who has a considerable amount of student loan debt should enroll in the new REPAYE/SAVE plan," said Jay Zigmont, founder of Childfree Wealth in Water Valley, Mississippi. "The combination of the lower payments and no loan growth due to interest make it a good option."

The 'on-ramp'

In addition to lowering payments, the Biden administration is seeking to block some of the punishments for not paying them — at least temporarily. To that end, the White House announced what it's calling an "on-ramp" to repayment: a 12-month period during which debt holders who miss payments are "not considered delinquent, reported to credit bureaus, placed in default, or referred to debt collection agencies."

Those 12 months start in October this year. The timing is important, because October is right around when loan servicers are likely to start asking for payments, since the national repayment pause expires at the end of August.

"The idea is to give people a way to ease into repayment," Kantrowitz said. "If you're late with payments, you won't be charged with late fees or any other negative consequences."

On the other hand, the on-ramp does not block the build-up of interest.

"It's not an extension to the payment pause and interest waiver, because interest does accrue during the on-ramp," Kantrowitz warned. "You are always better off making payments than not."

Other forgiveness policies

Even apart from these new measures, there are other paths to forgiveness. And unlike Biden's executive order, some of these policies were authorized by Congress many years ago, leaving them less vulnerable to legal challenges.

Teacher Loan Forgiveness, for example, was enacted in 1998. This program forgives up to $17,500 in certain federal loans for teachers who worked for at least five years at low-income schools or educational service agencies. More information can be found on the U.S. Department of Education's website.

Public Service Loan Forgiveness (PSLF), which was established in 2007, is even broader. For employees of government agencies and non-profit organizations, the program forgives whatever's left of certain student debts after 120 monthly payments — in other words, typically after 10 years. The DOE website provides more details on this program as well.

"Existing routes to loan forgiveness are still available to be pursued," said Jeff McDermott, the founder of Create Wealth Financial Planning in Saint John's, Florida. "There are several considerations here, though, including taxes and the cost of carrying the debt for that long versus paying it off more quickly."

Different solutions will work best for one individual client or another, and every borrower can benefit from financial advice. But, most importantly, clients should know that many options for student debt relief still exist.

"The one thing I am not recommending is any type of private student loan refinancing," Zigmont said. "The new federal options are just too attractive in most cases."