Thousands of local borrowers in limbo after Supreme Court’s ruling on student debt forgiveness
Last year, the Biden administration opened up applications to those who wanted to have some or all of their federal student loan debt erased. Nearly 13,000 people in Bloomington-Normal applied. That’s about 1 in 10 people living in the Twin Cities.
That plan was struck down. In June, the Supreme Court ruled 6-3 that President Biden does not have the authority to forgive billions in student debt — up to $20,000 for Pell Grant recipients and $10,000 for many other borrowers. It came after a year’s worth of legal challenges to the plan.
In interviews with WGLT, several student borrowers in Bloomington-Normal said they were blindsided and disappointed by the Supreme Court’s decision that now leaves them unsure of what to do.
Rebekah Mangels, a graduate student at Illinois State University, said she cried when she heard about the Supreme Court decision.
“When the Supreme Court decision came through, I just really felt stupid for having that much hope,” said Mangels, one of millions who had applied for loan forgiveness. “I just felt idiotic for harboring so much hope that the Supreme Court would rule in our favor.”
Mangels earned her bachelor’s from Wheaton College. Her parents worked for a nonprofit in Europe, where their salary is fundraised based on their cost of living. As they moved to Germany, that cost went up, resulting in less financial aid for Mangels’ senior year. So she took out a loan.
“I was really, really burned out, and I almost quit college, actually,” said Mangels. “And so I had been working maybe two to five jobs every year up until that point to stay out of debt. And I was very intentional about trying to stay out of debt as long as possible. I was actually convinced that I was going to be staying out of debt until the very end of my college time. That was until they changed my financial aid.”
Mangels’ loan totalled $5,500 for her senior year at Wheaton College, which she admits was not too bad on its own. However, as she became a graduate student at ISU, the high cost of living became a problem. She expects to have about $32,500 in total student debt when she graduates ISU.
“I think ultimately, like some of the strikes we've seen over the summer for example, this is not solely a problem with academia,” said Mangels, who is part of ISU’s Graduate Workers Union. “This is a problem everywhere. Workers everywhere are being underpaid and overworked — UPS, Starbucks, WGA, SAG-AFTRA — that whole situation is just evidence of the fact that we're all so fed up of being financially in stress.”
Biden’s backup plans
After the Supreme Court’s ruling, the Biden administration says it’s trying other ways to help borrowers.
One is the new Saving on a Valuable Education, or SAVE, income-driven repayment plan. Rather than forgiving debt for borrowers, SAVE would maintain small monthly payments for borrowers and prevent high interest from driving up debt. In the plan proposed by the Department of Education, borrowers that used to pay just shy of $11,000 for every $10,000 borrowed would now pay back $6,121.
Separately, true forgiveness is also still on the table for hundreds of thousands of borrowers affected by the mishandling of a previous income-driven repayment (IDR) system. Two conservative groups have filed a lawsuit against that forgiveness plan, which would cancel $39 billion in student loans for more than 800,000 borrowers.
“A lot of borrowers that were entitled to student loan forgiveness through these IDR plans were not getting forgiveness because loan servicers lost records, or they forgot to document payments,” said Constantine Yannelis, associate professor of finance at the University of Chicago Booth School of Business. “So that problem is fixed for a lot of people.”
Yannelis also gave more detail on the specifics of the new SAVE program.
“Undergraduate borrowers only pay 5% of their income above 225% of the poverty line,” said Yannelis. “So if people are not earning high salaries, or moderate salaries, they'll make very low or even no payments, and their balances will be forgiven after 10 years. So going forward, I think we're going to see substantial forgiveness through that plan, SAVE, assuming it stands up in court.”
Illinois State University’s average annual cost is $20,579, according to the government’s College Scorecard. For borrowers that finish their undergraduate degree at ISU, their median total debt is $20,482. Among students that have gone to ISU, whether or not they graduated, only 3% have defaulted on their loans, according to the Scorecard.
Illinois Wesleyan University is a private university of about 1,600 undergraduate students, who have a higher median total debt ($27,000) after graduation. However, IWU differs in that a higher percentage of students receive federal loans (68% vs. 53%) than at ISU. The average IWU grad also has higher median earnings ($66,591) compared with ISU ($58,781). Both schools’ graduates are earning above the national average of $50,000 among four-year universities.
Since March 2020, tens of millions of federal student loan borrowers have had the option to take a break from paying back their student loans without earning additional interest. But in May, Congress voted to include a restart provision in its deal to avoid a debt default. That means federal student loan borrowers will be expected to start making payments again this fall, with the first deadline falling in October.
“Starting October, interest will start accruing, so individuals can either start making payments, including those interest payments, or wait for another year and end up paying more,” said Yannelis. “Now, I think it was a wise decision to create this on ramp procedure, because I'm really concerned about a wave of student loan defaults once payments resume.”
Yannelis’ concerns stem from two issues. The first is that over the past three years without payments, borrowers and servicers have lost touch with one another, which could lead to sending important information to former addresses. The other possibility is that some servicers that have left the business have transferred the responsibility to other companies, leading to debt holders thinking mail from the new company is spam.
Ian Sheridan of Bloomington-Normal earned a bachelor’s degree in audio engineering from the Art Institute of Chicago. Sheridan borrowed roughly $32,000 through Subsidized Direct Stafford Loans, and an additional $22,000 in private loans through Sallie Mae.
Looking to make ends meet after landing a full-time job in his field, Sheridan consolidated his private loans and sold his car, spending a year’s worth of Illinois weather with only a bike to commute. In doing so, Sheridan paid off his private debt and now only has federal loans left to pay off.
Sheridan said it was eye-opening to find himself in that position. He feels that he cannot be the only one to have been put in that situation, and that the system should not be built that way.
Some argue against forgiveness — that those that don’t take out a loan should not have to subsidize those that do. However, Sheridan says those people will also be affected when his loan repayments resume in the coming months.
“It's not about getting a handout, but I can assure you where that 400 bucks a month that I'm estimating I'm gonna be paying is going to come from. It's gonna come from local restaurants, it's going to come from local bars, it's going to come from your HVAC guys, your mechanics, your plumbers,” said Sheridan. “Ironically, sometimes those are the same folks that are telling me to pull me up by my bootstraps and, you know, figure it out and pay for it.”
Yannelis says there is some truth to that. But with the SAVE plan, borrowers would be assured that the percentage of their income spent on loan debt is decreased.
“Think of this as being similar to a small tax,” said Yannelis. “We don’t think that a small tax increase would lead to a massive consumption shock for the economy.”
As borrowers wait to see if the new Biden plans will pass legal review, people like Bloomington’s Victoria Fetter will continue to feel uncertainty.
Fetter has about $50,000 in student loan debt, from an undergraduate degree at Greenville University and a master’s at ISU. She works as a substance-use therapist in Bloomington.
Fetter said things now are far different from when she first made the decision to take out a loan.
“I made this decision in 2016. The housing market, the food, the gas . . . I thought I could budget to pay for my student loans based on 2016 prices of things,” said Fetter. “I didn't know in 7 to 10 years, everything was gonna triple.”
Sheridan, the audio engineer from Bloomington-Normal, says it is unrealistic to expect college students to be able to make these decisions when it is so hard to predict the economy that shapes student debt.
“I think people like my age don't understand how loans work necessarily,” said Sheridan. “And I need stuff explained to me, so I can't imagine, like, somebody in their early 20s getting somebody giving them a piece of paper being put in front of you saying, ‘This is the way that you do it,’ of course you're gonna sign.”