Recent federal action on student loans could have big implications for California borrowers. The US Supreme Court ruled against the Biden administration’s plans to forgive loans to over 40 million Americans. The plan would have forgiven up to $10,000 in debt for borrowers earning under $125,000 a year, and up to $20,000 in debt for those who received a Pell grant (federal grants for students from lower-income families). Just prior to the ruling, a debt-ceiling deal ended the freeze on payments and interest accrual that had begun in March 2020. Interest will resume on September 1, with the first payments due starting in October.
What does this mean for Californians? As shown in our recent fact sheet on student debt, about 4 million Californians have federal student loan debt, owing in total almost $150 billion. On average, students are able to make payments on their loans. Loan default and delinquency rates are generally low (under 6%) for students attending public and private nonprofit four-year schools. However, historically those who attend a for-profit institution and those who do not finish their degrees have been more likely to struggle making payments.
The good news is that regardless of past payment history, all borrowers will start in good standing this fall, with defaults and delinquencies erased during the pandemic. Loan balances have remained steady as well during the freeze. The median borrower in California has a balance of between $10,000 and $20,000, but a third of California borrowers (about 1.3 million) currently owe less than $10,000 in their federal loans.
The Biden administration has also made changes to its income-driven repayment plan, which sets payment levels as a function of income and family size. The SAVE plan could significantly reduce, or even eliminate, payments for borrowers with lower earnings who are most likely to struggle with making payments.
Going forward, we could also see changes in student borrowing behavior. In 2020, only about a third of Californians borrowed for their four-year undergraduate degrees, compared to 44% nationally. Both national and California rates of borrowing are down from recent highs (54% and 49%, respectively) just after the Great Recession. However, college costs could soon be increasing for some students. The University of California will increase tuition for entering students yearly with inflation, and California State University is also proposing to increase tuition over the next five years.
Access to financial aid is another factor that can affect student borrowing. California is in the first year of implementing a new law that requires high school seniors to fill out the FAFSA (i.e., the Free Application for Federal Student Aid), which allows low-income students to access federal Pell grants, work-study programs, and subsidized loans, as well as state and institutional financial aid. We have seen an increase in applications for aid from California students, but there is still room for improvement.
Helping to ensure that college is affordable for as many students as possible is a crucial step toward expanding educational and economic opportunities for more California youth. PPIC will continue to track patterns in student borrowing and will monitor the effects of mandated financial aid applications on enrollment in higher education.