Biden’s Big New Student Loan Forgiveness Plan. What the President’s Plan to Forgive Up to $20,000 in Debt Could Mean for You.
President Joe Biden announced his administration’s long-awaited student loan forgiveness plan Wednesday, saying it will forgive $10,000 in student loans for borrowers who earned less than $125,000 during the pandemic. People who received Pell Grants, grants to low-income students, while they were enrolled in college will be eligible to have $20,000 in debt forgiven.
The move will be enough to wipe out some student debt entirely: 15 million of the 43 million people with federal loans owe less than $10,000, and those borrowers are typically the most likely to fail to pay back their loans. In all, the plan will eliminate student debt for about 20 million people, according to an analysis provided by the Education Department, and decrease monthly payments by an average of $250 for borrowers with a remaining balance who are on standard 10-year payment plans.
The Committee for a Responsible Federal Budget, an anti-deficit group, came up with a price tag of $230 billion for a less generous version of the program that did not include the additional aid for Pell Grant recipients.
Biden’s announcement came after months of speculation and a pandemic pause on student loan payments that lasted more than two years. Ultimately, the plan showcases the attraction, and the limitation, of executive action. Biden had the opportunity to provide immediate financial relief to millions in need, and he took it. But the challenge of preventing people from falling into the student debt trap in the future remains.
Here’s what we know about the policy and how it would work
I have student loans. What does the announcement mean for me?
If you have a federal “Direct Loan” — the most common type of student loan — issued before June 30, 2022, you will be able to apply to have your outstanding balance reduced. All direct loans are eligible, including loans to parents and graduate students.
If you qualify and your balance is less than $10,000, the loan will be retired; if you received a Pell Grant while enrolled in college, the amount that can be forgiven goes up to $20,000.
Only people who earned less than $125,000 as an individual or $250,000 as part of a married couple in 2020 or 2021 will be eligible for forgiveness.
The Education Department said in a press release Wednesday that 8 million borrowers may be able to qualify automatically because the Education Department already has information about their income. That still means the majority of people will have to apply. The application is not yet available, but the department said it will be made public before the end of the year.
If you aren’t eligible for forgiveness, or if it pays off only part of your loan balance, loan payments will resume in January 2023.
About 10 million people, about a quarter of student loan borrowers, have federal student loans that are not “Direct Loans.” Most of these borrowers took out loans before 2010 through a now-defunct program in which private banks made student loans that were guaranteed and subsidized by the federal government. Others borrowed directly from their college through the federally financed, also-defunct Perkins Loan program. The Education Department says that non-Direct Loans and Perkins Loans currently held by the federal government will be eligible for forgiveness, while solutions are currently being explored for the minority of non-Direct Loans that are held by private entities.
The president, who attended the University of Delaware as an undergraduate, has said that he doesn’t want to subsidize well-off people who borrowed money for Ivy League degrees. The White House is likely wary of potential news stories about law firm partners getting what amounts to a five-figure check to write off their law school debt at the same time that less wealthy families are struggling to afford gasoline and food.
The $10,000 limit also reflects a peculiarity in the relationship between the size of student loans and the likelihood of students paying them back. A study from the New York Fed found that students are most likely to default on the smallest loan balances and least likely to default on the largest. That’s because, if you’re a student, the only way to get a large student loan from the federal government is to go to graduate or professional school.
Many people with small loan balances, by contrast, are college dropouts. They didn’t borrow much, but they have no credentials to help them earn better wages. Or they borrowed for a certificate that takes less than a year to earn and doesn’t have much value in the labor market. Many victims of exploitative for-profit colleges fall into this category. So do students who had few assets and little income before starting college.
Of the 43 million people with federal loans, 15 million owe less than $10,000. Another 9 million owe between $10,000 and $20,000. By eliminating a minority of outstanding debt, Biden would forgive most or all balances for the majority of student debtors, disproportionately those who are at the highest risk of default.
Many Republicans have publicly opposed loan forgiveness, particularly in recent months, as the movement for executive action has gained steam. In May, Senate Minority Leader Mitch McConnell said, “Student loan socialism would be a giant slap in the face to every family who sacrificed to save for college, to every graduate who paid their debt, to every worker who made a different career choice so they could stay debt-free.”
The typical college graduate provides so much analytic value for an incredibly diverse population of 43 million people with student debt. Black students, for example, are much more likely than others to take out student loans. They borrow larger amounts, are less likely to be able to pay down principal after leaving college, and are more likely to default — the legacy of centuries of state-sponsored racism that prevents Black households from building assets, and of predatory colleges that continue to target Black communities. The typical Black borrower would see their outstanding balance cut in half with $10,000 forgiven, according to an Education Department analysis.
Women take out the substantial majority of all graduate school loans because they live in a world with highly gendered labor markets that systematically require women to acquire, and pay for, more credentials than men — even though they often earn less.
The debt crisis is often blamed on a broken higher education system. In truth, the problem is that we don’t have a national system at all. The Department of Education lends money to any student who enrolls in an accredited college — and colleges themselves decide who is accredited, with minimal federal oversight. There are no federal controls on what prices colleges can charge and few meaningful regulations on the quality of education they provide. States are free to pull money out of public universities, raise tuition, and let federal loans fill the gap.
If the loan forgiveness program holds up in court, future presidents could declare more jubilees. But making students and parents borrow ever-larger sums for college and then sporadically forgiving loans based on political happenstance is no way to run a railroad. It would almost surely make all of the underlying forces driving up new loan balances even worse.
If, on the other hand, the debt write-off never returns, a lot of people who take out student loans for the first time next year and in the years after that are going to raise their hands and ask why, exactly, they don’t deserve the same.
