The recent passage of the Senate’s version of “The One Big Beautiful Bill Act” marks a pivotal moment in the ongoing debate regarding federal student loans. This legislation aims to impose strict limits on the amount of federal student loans that individuals can borrow. Presently, Americans are burdened with over $1.7 trillion in student loan debt, and the existing repayment framework has become an overwhelming and chaotic system.
For more than 15 years, the federal government has directed its efforts toward providing assistance to borrowers in the aftermath of their graduation. This was achieved through the introduction of various income-driven repayment (IDR) plans. These plans typically determine monthly repayment amounts based on a borrower’s income, offering loan forgiveness after 20 to 25 years of consistent payments. The first of these initiatives was the Income Contingent Repayment plan, succeeded by the Income Based Repayment plan in 2009, followed shortly by the Pay As You Earn plan and the Revised Pay As You Earn Plan. In August 2023, the government rolled out the Saving on a Valuable Education (SAVE) plan, which provided the lowest repayment rates among the options available, capped interest accrual, and offered early loan forgiveness for borrowers with lower balances. However, this innovative plan faced legal challenges from Republican lawmakers and was subsequently invalidated by a federal court.
The purpose of these loans was also to serve as an additional revenue stream for the government. However, a report by The Economist indicates that the government incurs losses of 25 cents for every dollar loaned out. Furthermore, officials project that the total cost of the student-loan portfolio will reach approximately $450 billion over the next nine years, raising significant concerns about the sustainability of such a system.
The politicization of the student loan crisis is also a critical aspect to consider. In 2020, then-President Donald Trump implemented a moratorium on federal student loan payments in response to the COVID-19 pandemic and subsequent government-mandated shutdowns. Following his election, President Joe Biden extended the moratorium due to substantial public demand, even as COVID-19 case numbers began to decline. It’s worth noting that from 2021 to 2023, Democrats held control over both the White House and Congress, yet no substantial loan forgiveness bill was put forward for a vote during this timeframe.
President Biden took executive action to forgive $10,000 in debt for each borrower, with an increase to $20,000 for those who received Pell Grants, contingent upon meeting specific income criteria. However, the Supreme Court struck down this executive order, stating that its economic implications necessitated congressional approval. In the aftermath, Democrats promptly shifted blame towards the Republican-controlled court for the ruling.
Upon lifting the loan repayment moratorium, under pressure from Republican lawmakers, President Biden instituted a de facto moratorium by announcing that defaulted accounts would not be sent to collections, nor would late payments be reported to credit agencies. This decision prevented enforced collections, such as wage garnishments and bank levies, on delinquent accounts. It seems that Democrats were strategizing, hoping that voters burdened with substantial student loan debts would favor their party, fearing that a Republican administration might resume aggressive collection practices.
The proposed legislative changes would restrict annual federal loan borrowing to $20,500 per year, while for professional schools, including law schools, this limit rises to $50,000. Additionally, the total borrowing cap would be set at $100,000 for master’s degrees and $200,000 for professional degrees. Currently, borrowers can finance the complete cost of attendance through GRAD PLUS loans, which are not subject to these caps.
Law schools, in particular, will be required to restrict their total cost of attendance to ,666 per year to enable their students to fully finance their education through federal loans. Many institutions may struggle to meet this benchmark, especially in areas with high local housing expenses. In certain cases, the tuition alone at law schools exceeds this proposed limit.
Students will need to cover any financial shortfalls arising from these caps. While some individuals may rely on personal savings or family support, others without such resources may face the difficult decision of not pursuing higher education.
This brings us to a significant concern regarding the caps on loans. Individuals from low-income backgrounds, particularly those without financial support, will find it increasingly challenging to afford an education that could lead to improved social mobility. Unfortunately, this may compel them to seek private loans.
Private lenders typically do not approve all loan applications, often conducting routine credit checks. Even if an applicant secures a private loan, they may encounter limited understanding from their lenders in cases of financial difficulty, such as job loss. Most private loan providers lack IDR plans, requiring borrowers to adhere to their agreed-upon payment schedules unless they qualify for a forbearance. Moreover, private loan companies have fortified creditor protections, making it arduous for borrowers to discharge their debts through bankruptcy. Petitioners must demonstrate “undue hardship” to avoid full repayment of their loans.
It is indeed unfortunate that some individuals may find themselves unable to attend law school due to these loan limits. Many law schools were established with the intention of serving the working class. If a significant portion of the student population is unable to meet tuition, living, and board expenses, institutions might be compelled to reduce tuition fees or risk losing enough students to threaten their operational viability.
Additionally, at the undergraduate level, several prestigious institutions are now offering full scholarships based on financial need. Families earning below a certain income threshold and possessing limited assets can qualify for these scholarships. While no law schools have adopted this model thus far, it is anticipated that top-tier institutions with substantial endowments may consider implementing similar initiatives.
The initiative to impose limits on federal student loans aims to rectify a flawed system that imposes substantial costs on both the government and taxpayers. It will take time to gauge how educational institutions will adapt to the new federal loan caps and whether these changes will effectively reduce the overall burden of student loan debt. Will schools maintain their tuition levels, hoping that students will discover alternative funding solutions? Alternatively, will they be driven to decrease tuition and operating expenses to remain viable?
Steven Chung is a tax attorney based in Los Angeles, California. He specializes in basic tax planning and resolving tax disputes. He is also empathetic towards individuals facing significant student loan burdens. You can reach him via email at stevenchungatl@gmail.com. Additionally, connect with him on Twitter (@stevenchung) and find him on LinkedIn.
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