The new Biden plan that could still erase your student loans

0:00This message comes from Capital One with the Capital One Saver Card. Earn unlimited 3 % cash back on dining and entertainment. Capital One. What's in your wallet? Terms apply. Details at CapitalOne.com. This is Planet Money from NPR. You know how sometimes you rewatch a movie and you're like, wait a second. The big twist was planted right there in the beginning and I just didn't notice it? Well, well, this here today, this is one of those kinds of stories. Yeah, except this was not a movie. This was last year when President Biden held a press conference about federal student loans. Well, good afternoon.

0:46Biden's up at a podium in front of a painting of Teddy Roosevelt riding a horse. It's a good painting. There's also a well-placed row of books right there in the background because, you know, this announcement, it was going to be about book learning. 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. Yeah, this was the big student loan forgiveness announcement, of course. Biden explained how the federal government intended to erase some or even all federal student loan debt for some 40 million Americans.

1:22Boom. There it was, the biggest student loan forgiveness program in history. All this means people can start, finally crawl out from under that mountain of debt. Now, you know, you would think that the speech could end there. Everyone can go home. The big announcement is made. But weirdly, Biden did just, like, keep talking after that. Yeah, he went in on this completely different student loan thing. And look, I follow these kinds of announcements for a living. I am an education reporter at NPR. Whatever this other part of the speech was, it turned real fast into absolute wonky word salad. Yeah, yeah.

2:04Here's a taste of that. We're proposing to make what's called an income-driven repayment plan simple and fair. And here's how. No one with an undergraduate loan today or in the future. And click. This is definitely where I would have turned the TV off because what even is any of that? So, OK, fast forward to today. And what we know is that things did not go great for that big headline grabbing announcement at the top of the speech. That giant forgiveness plan, it got challenged legally, went to the Supreme Court. And we know just weeks ago, the court struck it down. Yeah, dead. Now, since that ruling, there was a relatively small group of loans forgiven on, let's call them technicalities.

2:49But look, in terms of Biden's promise to make some big, sweeping loan forgiveness, like that died with the Supreme Court decision. Or that is what everyone, including me, seemed to think. And then one day, my education covering co-host here, Cory Turner, wanders up to my desk and says, no, no, no, Kenny. We need to go rewatch that Biden press conference. Because it's true. The plot twist was right there. At that moment when a lot of people tuned out during that incredibly dense bit of word salad. Make what's called an income-driven repayment plan. Yeah, that. That part right there. Today, we are here to tell you that it's looking more and more like that jargony stuff might have been a kind of separate, gigantic student debt relief plan hiding in plain sight.

3:44And, and, it may even be bigger than the one the Supreme Court just killed. Hello and welcome to Planet Money. I'm Kenny Malone. And I'm Corey Turner. And this idea of Biden coming into office and erasing debt with the stroke of his pen, it was dramatic, it was easy to understand, and also, it's not going to happen. No, no. But today on the show, we explain the sneaky other student loan forgiveness plan that is still alive and will affect millions of Americans. If you have federal student loans, there is a strong chance you could benefit from this, but only if you know what it is. So grab your word salad forks, folks.

4:30We're going to dig in to explain how this will work. It's time to eat.

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6:04Odd Lots is a podcast that explores the most interesting and relevant topics in finance, markets, and economics. Join the conversation with Joe Weisenthal and Tracy Alloway every Monday and Thursday. Listen to Odd Lots wherever you get your podcasts. Okay, so the loan forgiveness plan that everyone was talking about, the one that got killed, that was a relatively simple piece of policy, really, because, you know, the Biden administration, without Congress, tried to forgive a mountain of federal student loan debt in one fell swoop. Snap and done. That plan would have cost about$400 billion. And the Supreme Court said, no, no, no, no.

6:44You don't have the authority to do this, President Biden. Traditionally, only Congress has had the authority to spend that kind of money. And so in some ways, the story we're going to tell you today is about a different way of making policy. Yeah, it's about the Biden administration looking at the authority it maybe does have and finding an unexpected tool, almost a sneaky tool, really, to use for loan forgiveness. And that sneaky tool was created under a totally different president who was dealing with a totally different student loan problem. I'm ecstatic. To introduce to you President Bill Clinton.

7:24This is from 1993. President Bill Clinton is giving a speech to students at Rutgers University. I know it won't disappoint many of the students here to know that we also have to reform the whole system of student loans. Big round of applause there because, yeah, even 30 years ago, student loans, kind of a mess. In fact, there was this sort of crisis happening back then. Huge numbers of people were defaulting on their student loans. Right. So up to this point, unlike today, if you took out a federal student loan, you weren't actually borrowing directly from the U.S. government. You were borrowing from a private bank.

8:03And they were not very flexible about repayment. Yeah, you'd graduate and it didn't really matter whether or not you had a job or if you did, how much your job was paying. The banks would start asking for big monthly payments, basically no flexibility on that. And this was one of the reasons why by 1990, lots of borrowers were in trouble. Nearly one in four who went into repayment on their federal student loans defaulted within about a year. Yeah, one in four. And that default crisis, you know, that's a big part of what Clinton was proposing to fix there. Yeah, so he was proposing two big changes.

8:41Change number one, the federal government would start to cut out the banks and issue loans directly to students. And that would allow change number two, and this one's going to matter quite a lot, the government could then be much more flexible on how quickly each loan got repaid. So what we seek to do is to enable the American students to borrow the money they need for college and pay it back as a small percentage of their own income over time. He was pitching what's called an income-based repayment plan. And the details sounded pretty straightforward. A student's monthly loan payment would be based on their income after they graduated.

9:21So the government would take a look at your earnings and say, OK, based on your income, we think you can afford to pay, say, 50 bucks each month on this loan. Or$25 or$1, whatever. And, you know, what's so interesting to me is that when I hear this, you know, Maybe it sounds like some kind of government charity program, but no, this was very explicitly a way to keep people paying down their student loans. Like, you know, instead of people defaulting and then potentially not paying anything, this would be a way to at least get something from people little by little over a longer period of time.

9:57In fact, that was one of the selling points for income-based repayment back in 1993. According to Jason Delisle, he studies higher ed policy at the Urban Institute. The Clinton administration, when they testified before Congress, was asked, how much do you think this will cost? Jason says the Clinton administration projected that this program would basically be cost neutral. They said we view it as a wash where people sort of cross subsidized one another. High income people paid more, low income people paid less. And, you know, I think Congress at the time thought, OK, well, if that's what you're going to design, great.

10:32And so Congress passed Clinton's plan. The federal government started taking over the federal student loan system and gave the president, through his education secretary, the power to create the first large-scale income-based repayment plan. Congress also wrote a wide-open law which just says the secretary shall design an income-driven repayment plan that includes monthly payments based on a share of your income. He's laughing because that wide open law is another thing that would matter quite a bit. Because, you know, the law didn't just give Clinton this one time authorization to do his little income based plan.

11:13It said that any president, again, through their Department of Education, was allowed to keep creating income based repayment plans. And over the last 30 years, the Department of Ed and sometimes Congress have done exactly that. They've created a bunch of income-based repayment options, each with slightly different rules and increasingly tortured government names. Yeah, people who've taken out federal loans may recognize some of these weird ones. We started with ICR, Income Contingent Repayment. Then came IBR, Income Based Repayment. In 2012, President Obama created Pay As You Earn with the killer acronym PAY-E.

11:52Yeah, there's an E on the end. But then he created another one called revised pay as you earn, or of course, repayee. The point here is that there is now a totally accepted history of a president being allowed to create a new federal loan repayment plan. Yes, totally a thing that happens and has happened, which brings us back to where we started this whole episode. Well, good afternoon. Biden's big loan forgiveness press conference last summer, you know, Roosevelt painting, horse, etc. But, but, specifically, that moment where Biden just kept talking and got all word salad-y. If you go back and listen, hopefully now you can hear that what Biden is doing is simply announcing yet another one of these income-based repayment plans.

12:41We're proposing to make what's called an income-driven repayment plan simple and fair. And here's how. No one with an undergraduate loan today or in the future, whether for a community college or a four-year college. By our count, this will be the sixth such plan. It, too, has a belabored name, saving on a valuable education plan, which somehow turns into the acronym SAVE. You've got to drop a few words or letters, but whatever, it gets there. But here is the thing about Biden's save plan. It is unlike any repayment plan before it, because once you start to parse out the specific repayment details, you start to wonder, like, wait, wait a second.

13:26Are people actually going to end up repaying their loans with this? Yeah, it's a really big loan forgiveness program. Again, Jason DeLisle from the Urban Institute. I think it's going to be less obvious that it's a big loan forgiveness program to both borrowers and onlookers as well. But yeah, it's a big loan forgiveness program. After the break, how the Biden administration plans to turn loan repayment into loan forgiveness in a way we've never seen before.

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14:48Don't miss an episode of Disclosure, available on your favorite podcast app. Sometimes I will go out to dinner with my parents and my dad will insist on paying and then I'll say something like, oh, no, no, it's fine. You can pay for the parking meter and maybe some coffee later and a donut and it'll all even out. But I'm doing the math in my head and I'm thinking like, no, it will not all even out. Like these little things are clearly not going to add up to the whole dinner that I am trying to repay you for. Well, this is what I think of when I think about what the Biden administration is about to do with student loans.

15:28Yeah, this is definitely not the snap your fingers and forgive all the loans plan. The Supreme Court killed that one. But the plan we're going to describe is more like loan forgiveness in slow motion. And this all has to do with that new repayment plan that Biden announced. Right, right, right. It's a repayment plan where he basically says, hey, this is a loan, which, of course, historically is a thing that people have to pay back. But no rush on this one. Just pay what you can here. And when you run the math in your head, it maybe doesn't look like a lot of people are going to have to pay back all of their loan.

16:06And we're going to use the rest of this episode to simply explain how this slow motion forgiveness is going to work. And we're going to do that by walking through one very specific example. Hey. Hey. Thanks for doing this. I appreciate it. Yeah, no problem. This is Jana Goodman. She lives in the Milwaukee area, has three kids, and is one of the roughly 45 million people who have federal student loans. Jana took out about$28 ,000 a decade ago to attend a two-year technical college part-time while she was working full-time. She says it was a classic night school situation. I wanted to become a nurse at that time.

16:43And so I was going to go back and get a nursing degree, just an associate's to start. And that's when I started taking out loans. I was a single woman living on my own with my own apartment. So the only way that anything like that would be within reach for someone like me would be to take out loans. You know, if you think about it, when you take out a student loan, it's kind of a gamble. You're betting that the degree you hope to get will increase your earning potential, which will then help you pay off those loans. But Jana, like lots of borrowers, wound up taking a break from school. She got married, she started a family, and never ended up finishing her degree.

17:22Of course, she still had those$28 ,000 in loans. Yeah, so Jana is part of this really big group of people who have federal student loans but no degree. And that group really stood to benefit from Biden's original, you know, snap of the finger loan forgiveness program. And so Jana was really upset when the Supreme Court struck that down. I was at a loss. I felt just worried, like just something off in the distance, this doom cloud that was hanging out about to come over me. I'm still pissed that the student loan, like that the Supreme Court ruled against it. I think it's bullshit. Jana understood that the Supreme Court decision meant her debt wasn't going anywhere, especially not overnight.

18:06When I called her, she also hadn't heard anything about this sort of sneaky second loan forgiveness plan we're talking about today. Now, this is going to be a little confusing. Bear with me. The Biden administration is right now rolling out a brand new income driven repayment plan. Corey explains to Jana that, first of all, this Biden repayment thing, again called save, is something that she would have to opt into. And if she does opt in, that program basically has three smaller mechanisms, let's call them, that when they work together do add up to a kind of slow motion loan forgiveness that we've never seen before.

18:49And we're going to show you how that might work for Jana. OK, so mechanism number one. Under this new Biden repayment plan, the government is going to ask for its money back way more slowly by asking for way less money each month. Plus, a huge number of people will suddenly fall into this other category where they won't even have to make a monthly payment. Right. So Janice's situation, for example, she has a family of five. Traditionally, the government has said, hey, a family like that, they need about$53 ,000 a year to live on. So if Janice's family had earned more than that, which they did, the government would be like, you can clearly afford to pay us back for your student loan.

19:36You make enough money. So make a monthly payment, please. But Biden's new plan says, actually, people need more to live on. So for a family of five, like Jana's, they won't have to make a monthly payment unless they earn about$80 ,000 a year. Well, Jana's family earned a little less than that last year. So suddenly under this new plan, the government may not ask Jana to pay anything each month. And as we explained this to Jana, it was clear this was all news to her. So I understand I'm going to have to make some payments here. But I think they'll still be fairly low. You could qualify for a zero dollar payment.

20:12OK, so how. Yeah. So keep going. Jana was intrigued, clearly. But but look, that first thing, mechanism, whatever, by itself, that is not student loan forgiveness. Actually, it's kind of the opposite, because if Jana was paying nothing on her student loans every month, then typically interest would build up faster and faster and her student loan would balloon. But mechanism number two in this new Biden plan takes care of that, too. Here's how it works. As long as you're paying each month what the government thinks you can afford, any interest that you're not covering disappears. The government forgives it every month.

20:52So if the government says you can only afford a$0 monthly payment, well, then all the interest that month is forgiven. Yes, yes. However, Corey, interest forgiveness is also not loan forgiveness by itself. Because, you know, even if the government forgives Jana's interest every month, she's not making any payments. She would still have that big old loan that she has to pay off. Like that would still sit there and be there. And that, Kenny, is where the last mechanism, thing number three, comes in. For undergraduate borrowers who keep up with their payments for 20 years, the government promises to forgive whatever's left.

21:29And if you borrowed$12 ,000 or less from the government, maybe for community college, under this new plan, you'll only have to wait 10 years to get that forgiveness. Right. So, OK, all of this adds up to a situation where Biden is basically telling low to moderate income borrowers a version of what my dad would say to me about dinner. You know, a little payment here, a little payment here. You'll get us back. But no, eventually, the debt is forgiven before it's paid back. Yeah, so for low-income borrowers like Jana, you can see how this might work. If every month the government says your monthly payment is$0, and they just keep paying nothing over and over until 10 or 20 years later, depending on how much they borrowed, finally, boom, loan forgiveness without paying back a cent.

22:21So, yeah, it is not that original snap your fingers overnight loan forgiveness. But if you play it out, you get there. I definitely feel better having a very clear roadmap. And having it laid out like this is helpful for somebody like me, because as you we both know, it can be very confusing and complex. And despite, you know, the debt not being canceled, I think it's going to, I mean, I guess it's not the best, but I'm happy these things exist. I'm happy there's a way forward. Now, you can maybe hear that Jana's a little skeptical, even weary, she says, for the same reason that like every other borrower we've been talking to lately is skeptical.

23:08You know, they've been burned once already by the last big loan forgiveness promise. And this version is like, you know, not nearly as straightforward as that one. So, you know, you get it. And look, it's not going to be total loan forgiveness for every single person who borrows money. That'll only be for the lowest income borrowers. The Urban Institute ran the numbers and estimates that about one in five people who take out a federal student loan to pay for a bachelor's degree will never repay a dime. Yeah, so 20 percent. But still, Urban does estimate that the vast majority of people who borrow money for undergrad will eventually wind up having at least some of their federal student loan forgiven.

23:48The Biden administration says, look, this is a really important safety net, something we should have done a long time ago. But Jason Delisle, who who has been running these numbers at the Urban Institute, says this plan seems to go beyond even that. So no longer a safety net like it has been in the past for undergraduates. This looks more like a broad-based subsidy for undergraduate degrees through loan forgiveness. It's, you know, it's a very roundabout way of subsidizing higher education. The statistic that really drives it home for me compares the old repayment system to this one. And this math, by the way, comes straight from the Biden administration.

24:29They're not hiding anything. So historically, for every$10 ,000 the government loaned to students, it collected about$11 ,000. So that's$1 ,000 in the government's pocket. But with this new repayment plan, for every$10 ,000 the government loans, it's going to recoup about$6 ,100. dollars. So yeah, like that is a very different vision for a student loan program where the government makes a loan knowing that on average, it's going to forgive about 40 % of that loan. It's also a very expensive vision for a student loan program. The Department of Education estimated this will cost about$140 billion over the next 10 years.

25:11But a very recent independent estimate from outside the White House said this could end up costing$475 billion over the same period. That would actually be more money than Biden's original snap of the fingers loan forgiveness plan. Yeah, which, of course, brings us to the huge lubing question over all of this. Is this new plan also going to get challenged and struck down? Because, you know, like plan A, it is trying to do something super big and super expensive, maybe even bigger and more expensive, without going through Congress. The experts I spoke with agreed on two things. It would almost certainly get challenged legally.

25:54But also, this is important, this plan is actually built on much stronger legal ground than the other one. Yeah, you know, we talked to Jason Delisle about this, and he told us, Really, this goes back to that moment in 1993 when Bill Clinton was first selling Congress on the general idea of letting the president make these income-based repayment plans. This is a program that Congress clearly gave the authority to the Secretary of Education to design income-driven repayment plans. So it's in law. There aren't any parameters. I mean, I certainly think the administration is on safer legal ground in designing an income driven repayment plan.

26:41So, yeah, write tighter laws, I guess, if you don't like this. You know, Kenny, it's been interesting. As part of my job, I have talked to a lot of people who love this plan. They say this is a really important change that is going to help millions of people, specifically low income people, access college. I've also talked to lots of other people who ask, are we sure this is really the best way to help low-income Americans? Why this particular thing? Because, you know, the Biden administration has proposed a lot of other potentially powerful programs. I've covered a bunch of them. There was an effort to make community college free.