In a significant blow to President Joe Biden’s agenda, the US Supreme Court has rejected his plan to cancel $430 billion in student loan debt. The decision, delivered by Chief Justice John Roberts and supported by conservative justices, halted a move intended to benefit millions of Americans and fulfill a key campaign promise. The Supreme Court’s decision to toss out President Biden’s student debt relief plan will subtract from already cooling household spending power.
Court Ruling Thwarts Biden’s Ambitious Plan
The Supreme Court’s 6-3 decision to block the loan forgiveness program came in response to objections raised by six conservative-leaning states, namely Arkansas, Iowa, Kansas, Missouri, Nebraska, and South Carolina. These states argued that Biden’s proposal exceeded the executive branch’s authority, leading to a ruling that disappointed an estimated 26 million borrowers who had applied for relief since the plan’s announcement in August 2022.
Chief Justice Roberts Challenges Biden’s Approach
Chief Justice Roberts, in his opinion, criticized the Biden administration’s argument that the loan forgiveness program was merely a modification of an existing program. Roberts emphasized that such a broad action would necessitate explicit congressional approval and accused the administration of overstepping its authority. The court’s conservative justices invoked the “major questions” doctrine, which allows them to invalidate executive agency actions unless explicitly authorized by Congress, previously using it to overturn other Biden policies.
Biden Vows to Continue the Fight
President Biden, expressing his discontent with the court’s decision, denounced the ruling and affirmed his commitment to assisting student loan borrowers. At the White House, he declared that the administration would pursue alternative measures to provide the much-needed relief. Biden highlighted the utilization of the Higher Education Act as a means to deliver on his promise, assuring borrowers that he would employ all available tools to help them reach their dreams and alleviate the burden of student debt.
Impact on Growth and Inflation
The decision will affect the loans of more than 40 million Americans and means their finances won’t improve any time soon. In addition, regardless of that decision, and as a result of the recent debt ceiling negotiations, student loan debt repayments were already expected to resume in October after more than three years. According to the NYT, “tens of millions of borrowers, who, according to the Federal Reserve, paid $200 to $299 on average each month in 2019, will soon face the resumption of a bill that is often one of the largest line items in their household budgets.”
Unfortunately, it seems that most of borrowers decided to increase spending rather than paying down other debts. According to researchers from the University of Chicago, instead of using the relief funds to reduce their existing debts, individuals who were eligible for the payment pause actually increased their borrowing by an average of 3 percent, equivalent to $1,200, compared to those who were not eligible. The additional income was often channeled into increased spending by making minimum payments on credit lines, a strategy that appealed to many individuals, especially during the early stages of the pandemic when interest rates were low. The main problem is that, at the same time, interest rates on credit cards exploded, sometimes exceeding 20%.
Said differently, according to the Consumer Financial Protection Bureau, approximately 50% of borrowers who are set to resume their student loan payments have additional debts that have increased by at least 10% compared to their pre-pandemic levels.