The Education Department and consumer advocates warned this week how devastating the House Republican debt ceiling plan would be for student borrowers and those seeking higher education.
The plan would reverse the president’s student loan forgiveness up to $20,000 even if the Supreme Court rules in favor of its legality in the next months. It would also cancel the creation of a more affordable student loan payment plan.
Overall, the Education Department would see a 22% reduction in funding, the department said Tuesday, which would shrink the Pell Grant program that helps lower-income students afford college.
“Speaker McCarthy declared that he will force a catastrophic default and plunge America into recession unless he can claw back school relief dollars and prevent millions of hard-working Americans from getting the student debt relief they need coming out of the pandemic,” Secretary of Education Miguel Cardona said in a statement.
The proposal, which House Speaker Kevin McCarthy tweaked Tuesday evening in an effort to wrangle enough votes among the GOP to pass the House, comes as the Treasury continues to move money around to keep the federal government from defaulting on its debt.
Those maneuvers could stop working sooner than expected — as early as mid-June — if capital gains revenue continues to come in weaker than expected, Yahoo Finance previously reported. A default could shake the markets and send ripple effects through the economy.
President Joe Biden has already promised a veto, with the White House pointing to a recent Moody’s Analytics report that found the bill would cut into near-term economic growth if enacted.
“It is outrageous and unacceptable that lawmakers would prioritize political maneuvering over the financial wellbeing and future of millions of struggling student loan borrowers,” Natalia Abrams, president of the Student Debt Crisis Center (SDCC), said in a statement. “We call on Congress to put the needs of the people first and reject any legislation that seeks to undermine efforts to provide relief and support to those burdened by student debt.”
Already, 16 million borrowers have been approved for Biden’s student loan forgiveness announced last year, with 40 million borrowers likely eligible. The legality of the program is in the hands of the Supreme Court, which is expected to give a ruling in May or June.
Also at stake is an improved REPAYE income-driven repayment plan that would:
Raise the income exclusion allowance to 225% of the federal poverty level from 150%, giving borrowers more income for basic needs.
Decrease the discretionary income percentage to 5% from 10% on the amount of borrowers’ discretionary income that goes toward loan payment for undergraduate loans only.
Eliminates the negative amortization scenario where the balance grows as interest accrues because the IDR payment is too small to cover the interest payment.
Reduce automatic loan forgiveness to 10 years from 20-25 years of repayments for borrowers whose original principal was $12,000 or less.
“This proposal would make permanent the debt trap for any borrower who does not earn enough money to afford their monthly loan bills by blocking the Administration’s newly proposed income-driven repayment plan,” Mike Pierce, executive director of the Student Borrowers Protection Center (SBPC), said in a statement.
Additionally, the 22% budget cut would create a $17 billion shortfall in the Pell Grant program by 2026, according to a senior ED official. That would reduce the value of the maximum Pell Grant by $1,000 for 6.6 million recipients and eliminate Pell Grants altogether for 80,000 students, ED said in a press release.
Other education programs would also be in jeopardy, including funding for students with disabilities, low-income and rural students, and those with mental health issues.
“The student loan system was broken when President Biden inherited it from Donald Trump,” Pierce said. “Kevin McCarthy and House Republicans are making it clear they like it that way.”
Ronda is a personal finance senior reporter for Yahoo Finance and attorney with experience in law, insurance, education, and government. Follow her on Twitter @writesronda
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