President Joe Biden announced on Wednesday a plan by the federal government to forgive $10,000 of federal student loan debt, and an additional $10,000 for Pell grant recipients, for borrowers earning less than $125,000.
The Biden administration claims the move will provide relief to an estimated 43 million people and that nearly half of those borrowers will see their student debts fully canceled.
Additionally, anyone with undergraduate loans will now be able to cap their monthly loan repayment at 5% of their monthly income and the pause on federal student loan payments has been extended to Dec. 31.
See below for more information on the announcement.
Borrowers are eligible for this relief if their individual income is less than $125,000, or $250,000 for married couples, according to a statement put out by the White House.
Only federal student loan debt is eligible for relief. This includes PLUS loans, whether parents or graduate students took them out, according to The New York Times.
Borrowers who did not complete their degree also qualify for the debt relief, Biden said during a press conference on Wednesday.
The Department of Education estimates that, among borrowers who are no longer in school, nearly 90% of relief dollars will go to those earning less than $75,000 a year. The department also estimates that of the borrowers eligible for relief, 21% are 25 years and under; 44% are ages 26 to 39. More than a third of borrowers are over 40. Five percent of borrowers are senior citizens.
According to the White House statement, the debt relief plan is aimed at advancing racial equity.
“Black students are more likely to have to borrow for school and more likely to take out larger loans. Black borrowers are twice as likely to have received Pell Grants compared to their white peers. Other borrowers of color are also more likely than their peers to receive Pell Grants,” the statement said.
Additionally, borrowers employed by non-profits, the military, or federal, state, Tribal, or local governments may be eligible to have all of their student loans forgiven through the Public Service Loan Forgiveness program, according to the Department of Education.
When borrowers can apply for relief
In the coming weeks, the Department of Education will roll out information about the application process for loan payment relief as well as information on when the process will begin, according to Biden during a press conference on Wednesday.
The White House statement elaborated further:
“The Department of Education will work quickly and efficiently to set up a simple application process for borrowers to claim relief. The application will be available no later than when the pause on federal student loan repayments terminates at the end of the year. Nearly 8 million borrowers may be eligible to receive relief automatically because their relevant income data is already available to the Department.”
When can borrowers expect the relief?
The Department of Education will need to have up-to-date income data of borrowers in order to forgive loans. The education department said it will launch a “simple” application process in the coming weeks, and it will be available before the pause on federal student loan repayments ends on Dec. 31.
For borrowers who want to be notified by the Department of Education when the application is open, you can sign up here: Department of Education subscription page.
An exact date or time when loans will be forgiven has not been announced.
For borrowers that have more than $10,000 or $20,000 in debt
Relief is capped at the amount of borrowers’ outstanding debt. For the remaining balance, payments will be recalculated.
Biden has proposed a rule to create a plan that would cap payments at 5% of income, down from 10% to 15% in most existing plans.
Another facet of the rule-change would raise the amount of income considered non-discretionary income so that no borrower earning under 225% of the federal poverty level — roughly equivalent to a $15 minimum wage — will have to make a monthly payment.
The rule would also forgive loan balances after 10 years of payments, instead of 20 years, for borrowers with original loan balances of $12,000 or less. The Department of Education estimated that this rule-change would allow nearly all community college borrowers to be debt-free within 10 years.
Lastly, the rule would cover the borrower’s unpaid monthly interest. This means no borrower’s loan balance will grow as long as they make their monthly payments, even when that monthly payment is $0 because their income is low.
An example of how this rule change might look like were given by the White House:
“A typical single construction worker (making $38,000 a year) with a construction management credential would pay only $31 a month, compared to the $147 they pay now under the most recent income-driven repayment plan, for annual savings of nearly $1,400.”
The rising cost of higher education
Since 1980, the total cost of both four-year public and four-year private college as nearly tripled, according to a statement by the White House. Pell grant once covered nearly 80% of the cost of a four-year public college degree for students from low-income families, but now the grants only cover about a third of the costs.
According to a Department of Education analysis, the typical undergraduate student with loans now graduates with nearly $25,000 in debt.
The Biden administration called the significant burden of federal student loan debt a major obstacle for people and families that struggle to pay for buying homes, saving for retirement and starting new businesses. Cumulative student loan debt is $1.6 trillion and rising for more than 45 million borrowers.
The cost of the debt relief plan for the federal government
The plan of the $10,000 cancellation initiative alone could cost somewhere in the range of $300 billion to $980 billion, according to an estimate using a model that the Wharton School at the University of Pennsylvania developed. (The Penn Wharton model did not include the cost of wiping out up to $20,000 in student debt for Pell grant recipients).
Critics of debt relief
Some groups, such as the NAACP, have put out statements arguing that the debt relief plan does not do enough in alleviating the amount of debt for students with federal loans.
“Cancelling just $10,000 of debt is like pouring a bucket of ice water on a forest fire,” NAACP leaders wrote in a CNN Business opinion piece.
President Biden’s $10,000 student debt forgiveness is a far cry from the $50,000 loan forgiveness Democratic lawmakers, including Sens. Elizabeth Warren, Ed Markey and Rep. Ayanna Pressley have previously urged the president to implement.
Jason Furman, a former economic adviser for President Barack Obama, also criticized the Biden administration’s plan.
“Pouring rough half trillion dollars of gasoline on the inflationary fire that is already burning is reckless,” Furman wrote in a tweet. “Doing it while going well beyond one campaign promise ($10K of student loan relief) and breaking another (all proposals paid for) is even worse.”
In a statement, Rep. Tim Ryan (D-Ohio), seeking his state’s Senate seat, said: “While there’s no doubt that a college education should be about opening opportunities, waiving debt for those already on a trajectory to financial security sends the wrong message to the millions of Ohioans without a degree working just as hard to make ends meet.”
Senate Minority Leader Mitch McConnell (R-Kentucky) called the debt forgiveness a “slap in the face” and “astonishingly unfair” for families who already paid their debts.
Biden defends the plan
With the cost of higher education tripling in the last 40 years, Biden said during a press conference Wednesday that the purpose of his student loan relief plan was in order for America to remain competitive in the world and to give people a “fair shot.”
“An entire generation is now saddled with unsustainable debt in exchange for an attempt for a college degree,” Biden said. “The burden is so heavy that even if you graduate you may not have access to a middle class life that the college degree once provided. Many people can’t qualify for a mortgage to buy a home because of the debt they continue to carry.”
Of the 43 million borrowers that will be granted some relief, Biden said, 60% are Pell grant recipients. Biden pointed out how the Pell grant used to cover over 80% of the cost to attend a public university and now the grant covers roughly 32%, or only a third of the cost in the past.
Biden knocked back criticism about cancelling debt amid economic inflation this year. He said the federal government has already forgiven pandemic-era loans to hundreds of thousands of small businesses across the country.
“No one complained that those loans caused inflation,” Biden remarked. He also touted last year’s deficit cut of $350 billion last year and $1.7 trillion this year as the “single largest deficit reduction in the history of America” as means for paying for the loan forgiveness plan.
“The Inflation Reduction Act will cut it by another $300 billion over the next decade because Medicare will pay less for prescription drugs,” Biden said. “There is plenty of deficit reduction to pay for the program many times over.”