Federal loan forgiveness axed for now, employers could step in

The Biden administration’s program to cancel up to $20,000 in student loans is dead. According to the Supreme Court, in a 6-3 decision, the administration exceeded its authority under the HEROES Act to wipe out student debt.

Where does this leave student loan forgiveness?

Commenting on the Supreme Court’s decision, President Biden said the administration will take another stab at debt forgiveness under the Higher Education Act.

The Department of Education is also instituting a 12-month “on-ramp to repayment,” which will run from Oct. 1, 2023, to Sept. 30, 2024. Financially vulnerable borrowers who miss monthly payments during this period won’t be considered delinquent, reported to credit bureaus, placed in default, or referred to debt collection agencies. Borrowers don’t need to do anything to qualify for this on-ramp.

It’s unclear what will happen to employees who are already in default or when their student loan garnishments will be reactivated.

As part of the deal to raise the debt ceiling, the administration agreed to not extend the pandemic-related grace periods on student loan collections beyond July 31, with collections recommencing Oct. 1.

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This isn’t the end of the story for student loan collection grace periods, however. As reported by Politico, the administration is planning to allow an initial three-month grace period and subsequent 90-day grace periods.

What are your options?

According to the Federal Reserve, in 2019, the typical monthly payment on student debt ranged between $200 and $299.

Educational assistance plans under Internal Revenue Code § 127 allow you to pay or reimburse up to $5,250 a year on employees’ student debt and current educational assistance. If employees pay $299 a month, their annual debt is $3,588. You could wipe out this debt and employees would have some wiggle room if they wanted to tap into current educational assistance.

This isn’t a bad deal, and you could use it as a recruiting tool in a still-tight job market.

The easiest way to implement a student plan repayment program is to reimburse employees by having them submit proof they paid back their student loans every month. SECURE 2.0 will allow 401(k) plan sponsors to make matching contributions into the 401(k) accounts of employees who are paying back their student loans, for plan years beginning in 2024.

The IRS will need to issue guidance on this provision, so it’s prudent to wait to see what it releases.

What are employees’ options?

You can help employees decide which repayment plan is best for them by pointing them to the DoEd’s online resources. These aren’t new plans, however, and some borrowers have commented that the DoEd’s current income-driven REPAYE plan, under which interest continues to accrue, has left them paying way back more than they borrowed.

Proposed regulations replace the REPAYE plan with the Saving on a Valuable Education Plan. Under the SAVE Plan, interest would no longer accrue and borrowers in low-paying jobs would pay back $0. Borrowers already enrolled in the REPAYE program would automatically be enrolled in the SAVE Plan.

You can advise employees to take these steps:

  • Find out who their loan servicer is. Loan servicers are listed on their Federal Student Aid account dashboard.
  • Update their contact information with FSA and their loan servicers.
  • Enroll in a repayment plan. Employees can use FSA’s loan simulator to estimate their monthly payments and compare their repayment options.
  • If they’ve defaulted on their loans, they should look into the fresh start program.