What Does Biden’s Student Loan Forgiveness Mean for You?

On Aug. 24, President Joe Biden announced that he was canceling $10,000 to $20,000 in federal student debt for eligible borrowers making $125,000 or less per year.[1] He is also extending the student loan repayment pause through December and making changes to income-driven repayment plans with the goal of making payments more manageable.

According to 2022 research from the Federal Reserve Bank of New York, forgiveness of $10,000 per borrower would forgive $321 billion of federal student loans, and 11.8 million borrowers will see their total balance wiped out.[2] Undersecretary of education James Kvaal says that the number of borrowers who would see total student debt relief is actually 20 million.[3]

While the student debt forgiveness aspect of the plan has been grabbing headlines, the plan includes two other important components. Let’s explore all three.

Without a doubt the most eye-catching part of the plan is $10,000 to $20,000 in federal debt forgiveness for borrowers making less than $125,000 annually, or $250,000 for households. Pell Grant recipients who meet income requirements will receive $20,000 in forgiveness while all other eligible borrowers will receive $10,000. The following loans should be eligible for relief[4]:

• William D. Ford Federal Direct Loan Program loans, including subsidized, unsubsidized, Parent PLUS and Graduate PLUS loans

• Federal Family Education Loan Program loans held by the Department of Education or in default

• Federal Perkins Loan Program loans held by the Department of Education

• Defaulted loans, included subsidized Stafford loans (both those held with the Department of Education and those commercially serviced), unsubsidized Stafford Loans, Parent PLUS loans, Graduate PLUS loans, and Department of Education-held Perkins loans

The plan also broadens the standards for the Public Service Loan Forgiveness (PSLF) program, an initiative often criticized for being forbiddingly difficult to navigate. Federal borrowers who work with nonprofit organizations, the military, or federal, state, local or tribal governments will now be eligible to have their student debt balance forgiven once they have worked in a qualifying public service role for 10 years.[5]

Tip

Apply for PSLF forgiveness via StudentAid.gov before Oct. 31, 2022.

The Biden administration plans to launch an application to allow borrowers to see if they’re eligible for student loan forgiveness. Almost 8 million borrowers will see automatic relief because the Department of Education already has the necessary information about their income.

The plan extends the student loan repayment pause through Dec. 31, 2022. Payments will resume in January 2023. Biden says this will be the “final” extension under his administration.

In remarks to the press on August 24, Biden touted the plan as a response to the skyrocketing costs of a college education and a solution for the many borrowers who have been unable to buy a home or start a family because of the student debt they carry. “The cost of education after high school has gone up significantly…,” Biden said. “All this means is an entire generation is saddled with unsustainable debt in exchange for an attempt at least at a college degree. The burden is so heavy that even if you graduate you may not have access to the middle class life that a college degree once provided.” He noted that this plan will take important steps to fix a “badly broken system.”

Previously, income-driven repayment plans were capped at 10% of a borrower’s discretionary monthly income. This plan lowers that number to 5%. It also raises the income amount that is protected from repayment, so that borrowers making 225% or less of the federal poverty level will not have to make a payment, a change that will help minimum wage workers.

Under the new plan, loan balances will be forgiven after 10 years of payments—down from 20—if the original loan balance was $12,000 or less.

Finally, borrowers’ unpaid monthly interest will be covered. So, if you have a low monthly payment because of low income, for example, your balance won’t balloon.

Lawsuits are likely to follow. Charlie Rose, an Obama-era Department of Education lawyer, opined in a memo that presidents don’t hold the executive authority to unilaterally cancel debt.[6] Because of this, legal challenges could potentially tie up the relief before it’s delivered.

But if Biden’s plan moves ahead, borrowers could see a drop in their federal student loan balances in the coming months. Research estimates that with $10,000 of federal student loan forgiveness, the average borrower will receive a total of $8,478 in student loan forgiveness.[2] Additionally, this move will cancel 30.5% of delinquent or defaulted loans.[2]

And with Pell Grant recipients making up more than 60% of the borrower population, the $20,000 of relief will go to the majority of borrowers. The White House pointed out that nearly all Pell Grants go to families with incomes of $60,000 or less.[7]

If you're a borrower who meets the requirements for forgiveness, you're probably eager to get process started. According to the Department of Education, an online form will become available by early October for borrowers to apply.[4] In the meantime, they recommend taking these steps:

• Create a StudentAid.gov account if you don't yet have one. Once you're in, update your contact information and sign up to receive alerts.

• Check in with your student loan servicer and make sure they have the correct contact information for you as well.

• Once the application is available, complete it before Dec. 31, 2023.

Some economists say that student debt forgiveness will most benefit the already well-off, with analysis from the Becker Friedman Institute suggesting that loan forgiveness benefits high and middle-income borrowers substantially more than lower income borrowers.[8] That paper also points out that black and Hispanic borrowers stand to benefit less than the numbers suggest.

Other arguments against student debt forgiveness come from Republican leadership, with the Republican House Judiciary Committee account tweeting that Biden’s executive order will worsen inflation.[9] Meanwhile, House Minority Leader Kevin McCarthy tweeted that borrowers who already paid off their debts will foot the bill for this (though that’s also up for debate).[10]

Overall, critics fear Biden’s student debt forgiveness might worsen existing economic problems while primarily benefiting high-earners who don’t need the help.

Academic research from 2019 found that when education debt was wiped out via existing student loan forgiveness programs, borrowers became better consumers and workers.[11] The analysis of thousands of borrowers found that those whose total bill was forgiven pursued better jobs, paid down other debts, increased their spending and were less likely to default on other debts.

Sen. Elizabeth Warren (D-Mass.) tweeted that student debt cancellation will narrow the racial wealth gap, help borrowers who didn’t complete their college education and help borrowers make smart financial decisions.[12] With student loan debt topping $1.7 trillion dollars and 15% of loans in default, many say this is a move that will substantially improve lives that are otherwise on hold due to the ballooning costs of student debt.[13,14]

Of course, some proponents of student loan forgiveness disapprove of Biden’s plan because it doesn’t go far enough. A coalition of 529 advocacy organizations, for example, called for Biden to cancel all federal student debt, effective immediately.[15]

However, for millions of federal student loan borrowers, this is a win. While next steps are unclear, federal student borrowers will be eagerly waiting to see how these policies roll out.