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Student Loan Debt and Prisoners

by Ed Lyon

After Pres. Joseph R. Biden, Jr. (D) took action in August 2022 to forgive up to $20,000 in federal or federally insured student loan debt, nearly 22 million of some 44 million Americans affected rushed to sign up. Prisoners were not excluded from the plan, which was designed to forgive up to $10,000 in student loan debt for those earning up to $125,000 per year as individuals or $250,000 as a household.

The program also provided an extra $10,000 in debt relief for those low-income families who received Pell Grants. That group includes few prisoners today, though it will soon include more as the grant program expands. Crucially, prisoners in default on their student loans are not permitted to apply for future Pell Grants, making the debt forgiveness vital for them.

Then the program was frozen on November 13, 2022, when the U.S. Court of Appeals for the Eighth Circuit issued an injunction in reinstating a challenge mounted by six Republican-led states. The six sued to stop the Biden program, characterizing it as a partisan ploy. See: Nebraska v. Biden, 52 F.4th 1044 (8th Cir. 2022). The U.S. Supreme Court then agreed to hear an appeal to the case on December 1, 2022. Arguments are slated to begin in its February 2023 term. See: Biden v. Nebraska, 143 S. Ct. 477 (2022).

The program significantly adjusted federal Department of Education (DOE) rules for its Income-Driven Repayment (IDR) plans. There are several variations, but all begin with a borrower’s “discretionary” income — any excess over 1.5 times the federal poverty level. For 2023, that is defined as $13,590 annually for an individual or $27,750 for a family of four. So a couple who each work full time for $16.50 an hour and has two children also has a discretionary income of $2,031.25 monthly. Monthly payments under IDR plans equal 10–20% of this, meaning the couple owes no more than $203.13 to $406.25 per month for student loan payments. After 20 years of payments, any remaining loan balance is forgiven.

Under the Biden program, discretionary income is calculated at any excess over 2.25 times the poverty level — reducing the example couple’s discretionary income to just $296.88 per month. Student loan payments are then capped at 5% of this amount, or $14.84. And any remaining loan balance is forgiven after just ten years of payments. All together, these changes save the example couple $95,719.20.

Importantly, other changes in the new program mean that the ten-year limit includes any months a borrower spends in deferment or forbearance. That time is not counted under current IDR plans, which also “reset the clock” after loan consolidation. The new program changes that, too. It also includes a “fresh start” provision bringing all loans into one-time compliance, regardless of repayment status. [See: PLN, Nov. 2022, p.19.]

If the Biden plan survives the legal challenge, DOE Secretary Miguel Cardona said that the agency will automatically make these adjustments in July 2023 for those with student loans borrowed directly from the federal government. Those with federally insured loans from a commercial Federal Family Loan lender (FFLL) “should apply for a Direct Consolidation Loan by May 1, 2023, to get the full benefits of the one-time account adjustment,” DOE said.

Nearly 250,000 of the nation’s 2.3 million prisoners are burdened with student debt they cannot pay because of their imprisonment. A July 2022 joint report by the Student Borrower Protection Center and National Consumer Law Center noted that prisoners earn pennies an hour, if they are paid at all. They can’t afford postage, much less debt payments, and accessing their trust funds often takes weeks. This practically ensures late payments.

Communicating with DOE or FFLLs is next to impossible for prisoners prohibited from using internet-capable computers. Prison phone systems are not open to random calls. All numbers must be approved with businesses, government, and toll-free lines excluded. Calls are limited from 15–30 minutes in duration.

Write-offs and suspensions for imprisoned borrowers fall into two categories: INC, or Incarceration-Collectable, is for prisoners whose terms range from nine months to less than ten years. These accounts are returned to active status at the prisoner’s earliest release eligibility date, irrespective of release. INW, or Incarceration-Write-Off, is for those imprisoned for ten years or longer. If released, these prisoners must reinstate or rehabilitate their debt to emerge from default.

Jed Brewster, an Idaho prisoner whose student loans went into default after he was locked up, hopes to resume college courses using a Second-Chance Pell Grant when it becomes available later in 2023. [See: PLN, May 2022, p.44.] He said that navigating the Fresh Start program “was relatively simple”: He needed only to complete a Free Application for Federal Student Aid (FAFSA) and submit it to the college hosting the program at his prison when he enrolled. “[If] the financial roadblock from a person’s path [is removed], they will be more likely to pursue a college education,” Brewster said. 

Sources: NPR, New York Times, Vera Institute of Justice

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