Recently, the Senate passed their version of “The One Big Beautiful Bill Act,” which among other things would limit the amount of federal student loans someone can borrow. Americans owe over $1.7 trillion in student loan debt, and the current repayment system is one big ugly mess.
For over 15 years, the government focused on helping borrowers after graduation by introducing various income-driven repayment (IDR) plans. These plans generally set the monthly repayment based on the borrower’s income and forgave the loan balance after 25 or even 20 years. The first IDR plan was the Income Contingent Repayment plan. Later, the Income Based Repayment plan was introduced in 2009. A few years later, it was followed by the Pay As You Earn plan, followed by the Revised Pay As You Earn Plan. In August 2023, the government introduced Saving on a Valuable Education, which not only had the lowest repayment plan compared to the other plans but also capped interest accrual and provided early loan forgiveness for low-balance borrowers. But Republican lawmakers challenged the SAVE plan in federal court and had the plan invalidated.
The loans were also designed to provide another source of revenue for the government. But according to the Economist, the government loses 25 cents for each dollar lent. Also, officials expect the student-loan portfolio to cost around $450 billion over the next nine years.
Lastly, it is arguable that the student loan crisis has been politicized. In 2020, then President Donald Trump declared a moratorium on federal student loan payments due to COVID-19 and the government-mandated shutdowns. When President Joe Biden was elected in 2021, he kept the student loan moratorium due to public pressure even though COVID-19 cases were dropping significantly. It should be noted that Democrats controlled the White House and Congress from 2021 until 2023, and no loan forgiveness bill was brought for a vote during that time.
Biden issued an executive order forgiving $10,000 for each borrower or $20,000 if the borrower had Pell grants provided they met income thresholds. The Supreme Court invalidated this order ruling that the economic significance was strong enough to require congressional approval. Democrats were quick to blame the Republican court.
When Biden finally lifted the loan repayment moratorium due to pressure from the Republicans, he created a backdoor moratorium by announcing that delinquent accounts will not be sent to collections, nor will the government report late payments to credit agencies and resort to enforced collections such as bank levies and wage garnishments on delinquent accounts. Democrats might have been hoping that voters with large student loan bills would vote blue across the board because a Republican president would resume collections.
The proposed bill would cap annual federal loan borrowing to $20,500 per year. For professional schools (including law schools), the annual amount is increased to $50,000. Also, the total amount of loans will be capped at $100,000 for master’s degrees and $200,000 for professional degrees. Under the current plan, borrowers can pay the full cost of attendance through GRAD PLUS loans.
Law schools will need to limit their total cost of attendance to $66,666 per year so their students will be able to fully finance their education through federal loans. Many law schools will not meet this requirement due to local housing costs. At some law schools, tuition alone exceeds this amount.
Students will be responsible for covering any shortfalls. Some may have savings or family assistance. But some won’t have these resources and may have to consider not attending.
That brings us to the main argument against capping loans. Qualified people with low-income backgrounds and no financial resources will not be able to afford an education with which to obtain social mobility. They will have to resort to obtaining private loans.
Private lenders do not accept all loan applications as they do a routine credit check. Assuming an applicant gets a private loan, they may not get much sympathy from their servicer if there is a financial emergency such as a layoff. Most private loan companies do not have IDR plans so borrowers must stay with their agreed payment plan unless they qualify for a forbearance. Also, private loan companies have strengthened creditor protections in case a borrower decides to file bankruptcy. Bankruptcy petitioners must show that they will suffer “undue hardship” if they are forced to pay the loan in full.
Indeed it is unfortunate if some people will not be able to attend law school due to loan maximums. But many law schools were established with the working class in mind. If a large percentage of the student body find themselves unable to pay tuition, room, and board, schools may have to lower tuition or risk losing so many students that they will not have enough money to operate.
Also, at the undergraduate level, many top schools are offering full scholarships based on financial need. So long as a family earns below a certain amount, and has assets below a certain value, students will qualify. No law school has followed this model but will most likely be used by top schools that generally have large endowments.
The proposal to limit federal student loans seeks to fix a broken system that is costing the government and taxpayers money. It will take a few years to see how schools will react to federal loan caps and whether it will start reducing the total student loan debt. Will schools keep their tuition steady and hope their students find creative ways to obtain the necessary funding? Or will they be forced to cut tuition and operating costs in response?
Steven Chung is a tax attorney in Los Angeles, California. He helps people with basic tax planning and resolve tax disputes. He is also sympathetic to people with large student loans. He can be reached via email at stevenchungatl@gmail.com. Or you can connect with him on Twitter (@stevenchung) and connect with him on LinkedIn.
The post The Big Beautiful Bill Will Limit Federal Student Loans, Hoping To Fix A Big Ugly $1.7T Mess appeared first on Above the Law.
Recently, the Senate passed their version of “The One Big Beautiful Bill Act,” which among other things would limit the amount of federal student loans someone can borrow. Americans owe over $1.7 trillion in student loan debt, and the current repayment system is one big ugly mess.
For over 15 years, the government focused on helping borrowers after graduation by introducing various income-driven repayment (IDR) plans. These plans generally set the monthly repayment based on the borrower’s income and forgave the loan balance after 25 or even 20 years. The first IDR plan was the Income Contingent Repayment plan. Later, the Income Based Repayment plan was introduced in 2009. A few years later, it was followed by the Pay As You Earn plan, followed by the Revised Pay As You Earn Plan. In August 2023, the government introduced Saving on a Valuable Education, which not only had the lowest repayment plan compared to the other plans but also capped interest accrual and provided early loan forgiveness for low-balance borrowers. But Republican lawmakers challenged the SAVE plan in federal court and had the plan invalidated.
The loans were also designed to provide another source of revenue for the government. But according to the Economist, the government loses 25 cents for each dollar lent. Also, officials expect the student-loan portfolio to cost around $450 billion over the next nine years.
Lastly, it is arguable that the student loan crisis has been politicized. In 2020, then President Donald Trump declared a moratorium on federal student loan payments due to COVID-19 and the government-mandated shutdowns. When President Joe Biden was elected in 2021, he kept the student loan moratorium due to public pressure even though COVID-19 cases were dropping significantly. It should be noted that Democrats controlled the White House and Congress from 2021 until 2023, and no loan forgiveness bill was brought for a vote during that time.
Biden issued an executive order forgiving $10,000 for each borrower or $20,000 if the borrower had Pell grants provided they met income thresholds. The Supreme Court invalidated this order ruling that the economic significance was strong enough to require congressional approval. Democrats were quick to blame the Republican court.
When Biden finally lifted the loan repayment moratorium due to pressure from the Republicans, he created a backdoor moratorium by announcing that delinquent accounts will not be sent to collections, nor will the government report late payments to credit agencies and resort to enforced collections such as bank levies and wage garnishments on delinquent accounts. Democrats might have been hoping that voters with large student loan bills would vote blue across the board because a Republican president would resume collections.
The proposed bill would cap annual federal loan borrowing to $20,500 per year. For professional schools (including law schools), the annual amount is increased to $50,000. Also, the total amount of loans will be capped at $100,000 for master’s degrees and $200,000 for professional degrees. Under the current plan, borrowers can pay the full cost of attendance through GRAD PLUS loans.
Law schools will need to limit their total cost of attendance to $66,666 per year so their students will be able to fully finance their education through federal loans. Many law schools will not meet this requirement due to local housing costs. At some law schools, tuition alone exceeds this amount.
Students will be responsible for covering any shortfalls. Some may have savings or family assistance. But some won’t have these resources and may have to consider not attending.
That brings us to the main argument against capping loans. Qualified people with low-income backgrounds and no financial resources will not be able to afford an education with which to obtain social mobility. They will have to resort to obtaining private loans.
Private lenders do not accept all loan applications as they do a routine credit check. Assuming an applicant gets a private loan, they may not get much sympathy from their servicer if there is a financial emergency such as a layoff. Most private loan companies do not have IDR plans so borrowers must stay with their agreed payment plan unless they qualify for a forbearance. Also, private loan companies have strengthened creditor protections in case a borrower decides to file bankruptcy. Bankruptcy petitioners must show that they will suffer “undue hardship” if they are forced to pay the loan in full.
Indeed it is unfortunate if some people will not be able to attend law school due to loan maximums. But many law schools were established with the working class in mind. If a large percentage of the student body find themselves unable to pay tuition, room, and board, schools may have to lower tuition or risk losing so many students that they will not have enough money to operate.
Also, at the undergraduate level, many top schools are offering full scholarships based on financial need. So long as a family earns below a certain amount, and has assets below a certain value, students will qualify. No law school has followed this model but will most likely be used by top schools that generally have large endowments.
The proposal to limit federal student loans seeks to fix a broken system that is costing the government and taxpayers money. It will take a few years to see how schools will react to federal loan caps and whether it will start reducing the total student loan debt. Will schools keep their tuition steady and hope their students find creative ways to obtain the necessary funding? Or will they be forced to cut tuition and operating costs in response?
Steven Chung is a tax attorney in Los Angeles, California. He helps people with basic tax planning and resolve tax disputes. He is also sympathetic to people with large student loans. He can be reached via email at [email protected]. Or you can connect with him on Twitter (@stevenchung) and connect with him on LinkedIn.
