Students Face Financial Armageddon as Millions Risk Default on Loans

The Supreme Court has ruled against President Joe Biden's student debt forgiveness program, in a decision that could have a lasting impact on graduates' finances.

The Biden administration suspended loan repayments during the coronavirus pandemic, and had sought to knock at least $10,000 off the debt owed by eligible student borrowers—but this was blocked by lower courts, sending the dispute for final appeal.

One study has suggested as many as 17 million Americans could soon face defaulting on their student debt—which could lead to other financial troubles.

The student debt forgiveness program utilized the HEROES Act, legislation passed in the wake of 9/11, to allow Education Secretary Miguel Cardona to make changes to the federal student loan system during a national emergency.

While the Biden administration argued it acted within the law, saying the pandemic counted as a national emergency, House Republicans say it exploited legislation drafted to help service personnel and veterans.

"Six States sued, arguing that the HEROES Act does not authorize the loan cancellation plan. We agree," Chief Justice John Roberts wrote in Friday's decision.

Justice Elena Kagan wrote the dissenting opinion, stating that the Supreme Court majority's decision "overrides the combined judgment of the Legislative and Executive Branches, with the consequence of eliminating loan forgiveness for 43 million Americans."

Repayments are now expected to resume in October.

In 2018, the Brookings Institute published research suggesting that if cumulative default rates were to continue as they had been previously, nearly 40 percent of student borrowers could default by this year.

With 43.6 million people in the U.S. still holding federal student loans as of the second financial quarter of 2023, this would suggest that around 17.4 million people could be at risk of defaulting on their debt.

The Brookings study predated the pandemic, and the two-and-a-half-year freeze on repayments, so the risk of so many Americans defaulting on their debt may not be immediate after repayments start.

However, many are now facing a cost of living crisis brought on by the pandemic and the Russian invasion of Ukraine, as well as rising interest rates to combat inflation—putting pressure on other household debt, such as mortgage repayments.

Brookings said at the time that student loans were the second-largest source of household debt after housing repayments.

Newsweek approached the Supreme Court for comment via email on Friday.

According to LendEDU, a consumer financial advice firm, the federal government only considers loans to be in default after 270 days of non-payments.

Once someone does go into default over their student debt, it could impact on their credit score, lead to payments being deducted from paychecks, and they could lose eligibility for federal benefits.

The Department of Education said in November that 26 million people had provided it with the requisite information to be considered for the program, 16 million of whom had been approved for debt relief.

However, the court orders the Supreme Court was considering prevented it from taking on additional applicants and forgiving student debt altogether.

At a Senate hearing in May, Cardona suggested the government was planning to introduce targeted debt relief for "borrowers who are struggling right now," but declined to go into detail as to what policies that may take the form of.