How the Supreme Court student loan decision affects you

NEW YORK (AP) — The Supreme Court has ruled the Biden administration overstepped its authority in trying to cancel or reduce student loan debt, effectively killing the $400 billion plan, which would have canceled up to $20,000 in federal student loans for 43 million people. Of those, 20 million would have had their remaining student debt erased completely.

The court’s decision means, barring an act of Congress, those Americans are on the hook for payments starting in October.

Still, borrowers who are worried about their budgets do have options. For instance, the government has other loan forgiveness programs that are still in effect, even if Biden’s plan was struck down. Biden also on Friday announced additional efforts to bring relief to borrowers.

Here’s what to know about how the decision will affect you:

Student loan payments that have been frozen for the last three years because of the pandemic are set to restart in October. That was going to happen no matter what the Supreme Court decided. Interest will start accruing Sept. 1.

Betsy Mayotte, president of the Institute of Student Loan Advisors, encourages people not to make any payments until the pause has ended. Instead, she says, put what you would have paid into a savings account.

“Then you’ve maintained the habit of making the payment, but (you’re) earning a little bit of interest as well,” she said.

Mayotte recommends borrowers use the loan-simulator tool at StudentAid.gov or the one on TISLA’s website to find a payment plan that best fits their needs. The calculators tell you what your monthly payment would be under each available plan, as well as your long-term costs.

Katherine Welbeck of the Student Borrower Protection Center recommends logging on to your account and making sure you know the name of your servicer, your due date and whether you’re enrolled in the best income-driven repayment plan.

Hours after the Supreme Court decision, President Joe Biden announced a 12-month grace period to help borrowers who struggle after payments restart. Biden said borrowers can and should make payments during the first 12 months after payments resume, but, if they don’t, they won’t be at risk of default and it won’t hurt their credit scores. But details about this plan have yet to be released.

After that grace period, if you’re in a short-term financial bind, you may qualify for deferment or forbearance — allowing you to temporarily suspend payment.

To determine whether deferment or forbearance are good options for you, you can contact your loan servicer. One thing to note: interest still accrues during deferment or forbearance. Both can also impact potential loan forgiveness options. Depending on the conditions of your deferment or forbearance, it may make sense to continue paying the interest during the payment suspension.

If you’ve worked for a government agency or a nonprofit, the Public Service Loan Forgiveness program offers cancellation after 10 years of regular payments, and some income-driven repayment plans cancel the remainder of a borrower’s debt after 20 to 25 years.

Borrowers should make sure they’re signed up for the best possible income-driven repayment plan to qualify for these programs.

Borrowers who have been defrauded by for-profit colleges may also apply for borrower defense and receive relief.

These programs aren’t be affected by the Supreme Court ruling.

An income-driven repayment plan sets your monthly student loan payment at an amount that is intended to be affordable based on your income and family size. It takes into account different expenses in your budget, and most federal student loans are eligible for at least one of these types of plans.

Generally, your payment amount under an income-driven repayment plan is a percentage of your discretionary income. If your income is low enough, your payment could be as low as $0 per month.

If you’d like to repay your federal student loans under an income-driven plan, the first step is to fill out an application through the Federal Student Aid website.

— If you sign up for automatic payments, the servicer takes a quarter of a percent off your interest rate, Mayotte says.

— Income-driven repayment plans aren’t right for everyone. That said, if you know you will eventually qualify for forgiveness under the Public Service Loan Forgiveness program, it makes sense to make the lowest monthly payments possible, as the remainder of your debt will be cancelled once that decade of payments is complete.

— Reevaluate your monthly student loan repayment during tax season, when you already have all your financial information in front of you. “Can you afford to increase it? Or do you need to decrease it?” Mayotte said.

— Break up payments into whatever ways work best for you. You could consider two installments per month, instead of one large monthly sum.

Biden’s administration plans to pursue student debt cancellation with a different legal justification than the one struck down by the Supreme Court. The White House hopes to provide relief instead by using the Higher Education Act, a broad federal law that governs the student loan program. Exactly who would be eligible and how much would be canceled will be decided through a federal rule-making process. But that process can take months, or even longer, so this attempt at cancellation won’t come quickly.

Biden’s new legal justification for broad debt cancellation takes the same approach long proposed by Sen. Elizabeth Warren and borrower advocates. It uses a provision of the Higher Education Act allowing the Education Secretary to “compromise, waive or release” student loans. It’s the same basis the Biden administration used last year to forgive $6 billion in loans for borrowers who were deceived by their colleges.

The details of the new forgiveness will be negotiated through a federal rulemaking process the administration launched on Friday. The process, which can take many months, allows the Education Department to write or change federal regulation that carries the weight of law.

But there’s no guarantee the plan could survive another legal challenge. The Higher Education Act has been used to cancel student debt, but never at this scale. Education lawyers for the Trump administration concluded in 2021 that the education secretary “does not have statutory authority to provide blanket or mass cancellation” under the act.

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Binkley reported from Washington.

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The Associated Press receives support from Charles Schwab Foundation for educational and explanatory reporting to improve financial literacy. The independent foundation is separate from Charles Schwab and Co. Inc. The AP is solely responsible for its journalism.