The federal student debt loan amount is $1.7 trillion. This debt portfolio is an installment personal loan. Payments occur monthly. Active students have loan totals not due this year. We have no idea how much of the total will be repaid.
The Saving on a Valuable Education (SAVE) plan is President Joe Biden and Secretary of Education Miguel Cardona’s reply to the Supreme Court, who ruled the administration’s original sweeping forgiveness program was unconstitutional. The SAVE plan was announced in August 2023. The White House bulletin included a table of payment amounts, indexed by the number of dependents and size of loan.
It is the greatest gift for all income-dependent student-debt payoff plans. It is a Trojan horse for the state to control higher education.
The “original” student loan program from the sixties repaid loans plus interest in a straightforward installment-style plan. A $7,500 loan might take ten years to fulfill. Larger loans received longer terms.
The federal government’s interjection into debt financing came with the Income-Contingent Repayment plan, passed in the 1993 Student Loan Reform Act signed by then-president Bill Clinton. The Student Loan Reform Act set payments at 20 percent of discretionary income. After twenty-five years of eligible payments, the plan writes off any outstanding debt. This was the first signal that the plans anticipated partial payments on student loans.
The slide toward free university accelerated in 2007 with income-based repayment. Monthly payments were calculated on what a student could pay, not what was owed, resetting Income-Contingent Repayment plan payments from 20 percent of income to 10 percent or 15 percent of discretionary income depending on the date the borrower first started borrowing student loans.
In 2010, President Barack Obama signed the Health Care and Education Reconciliation Act of 2010. Both the lending and collecting of loans was consolidated within the Department of Education (DOEd). This act nationalized the student loan process, putting it in the hands of political appointees, managed by an unprepared, non-banking-experienced staff. In 2010, student loan debt was half the 2023 total.
Income-dependent payback plans describe the four remaining options for paying student loans. SAVE is a new income-dependent plan. There are four common elements to all income-dependent plans.
Published poverty wages:
Poverty wages are deducted from adjusted gross income to produce “discretionary income.” Early plans deducted 100 percent of poverty wages. In the Affordable Care Act of 2010, poverty wage deductions became 150 percent. Later, the DOEd increased the multiplier to 200 percent. SAVE uses 225 percent of poverty wages.
Payment percentage:
Discretionary income is assessed by a fixed percentage to create a payment due. The original plan from 1993 used 20 percent of discretionary income. This changed to 15 percent of discretionary income in 2007. President (“I have my phone and a pen”) Obama issued a presidential memorandum reducing it from 15 percent to 10 percent.
Length of loan and unpaid balances:
If there is an unbroken record of payments, unpaid balances at the end of a loan term are forgiven. The DOEd waved the surrender flag for taxpayers. All loans will not be paid back to the Treasury.
Special status:
Most recently, the DOEd forgave the administration recently using extralegal authority for 1.5 million debtors with $28 billion in debts that were expunged by a department ruling of “substantial misconduct” by colleges that closed early. $45.7 billion was zeroed out by reclassifying 662,000 public service workers. This type of skullduggery is easier in the SAVE plan.
SAVE uses 225 percent of poverty wages as a deduction to reduce the subjective discretionary income. This reduced discretionary income uses a 5 percent calculation to create a payment due. The smallest amount of discretionary income assesses at the smallest percentage as calculated by the White House.
The SAVE plan is not eligible for loans in default. However, a phone call to the DOEd and enrollment in the “Fresh Start” program makes previously ineligible loans available for SAVE. Student payments that are seventy-five days delinquent will automatically enroll in the SAVE program. This can start the delinquency clock on loans greater than 270 days, erasing the record from credit reports. SAVE will eventually bring all loan payments under one process and one department, directed by the president.
We cannot be certain of the ultimate costs. With appropriate disclaimers (for static budgeting with hyperdynamic plans), the Congressional Budget Office suggests that the cost of implementing SAVE could cost $230 billion. Based on a five-year-old study, just under half of all student debt is estimated to be on income-dependent plans. The current number is likely greater based on trends. These plans have variable monthly payments during the term and have a forgiveness option, making any predictions of a final cost speculative. These plans are continually in flux. Any estimate of cost is a guess, more so after covid.
SAVE has legal challenges from attorney generals from three states. This challenge is not creating headlines. Without an injunction or congressional action, the plan would be initiated in July 2024. In June, twenty-five courts in Kansas and Missouri blocked further enrollment in the SAVE plan.
The SAVE plan fits the long-term goal of increased federal control of public higher education. The president can manipulate the plan to modify payments for a population demographic such as “dreamers” or for a major employment segment such as green energy ambassadors.
The courts’ challenge to this plan must succeed. We need a pause for a better fix on the actual debt. Both political parties have mismanaged this program. There are responsible measures in Congress to bring forward to cap this vote-buying scheme and protect taxpayers.
