Inside Biden’s Debt Relief Plan

President Biden announced today that he will cancel up to $10,000 in student debt for Americans earning less than $125,000 per year (or $250,000 for couples filing jointly) with additional relief for low-income Pell Grant recipients. He will also extend the current pause on student loan payments for an additional four months, through Dec. 31.

“The cost of education beyond higher school has gone up significantly,” said Biden. “An entire generation is now 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 the college degree once provided.”

The announcement marks an unprecedented act of executive authority and will be the first broad-based debt cancellation effort in American history. It comes after months of deliberation from the administration about its possible implications for the upcoming midterm elections in November, and fears that it could worsen inflation. Debt cancellation of up to $10,000 per borrower is favored by 55 percent of Americans. Most are pleased with the proposal, even prominent Democrats and civil rights groups that called for Biden to cancel more than $10,000 in student debt. The plan is expected to face legal challenges and has been highly criticized by Republicans as a costly handout.

Biden clarified today that this will be the last extension of the payment pause, which began in March 2020 under the Trump administration. The pause was set to expire in less than 10 days, on Aug. 31. “It’s time for the payments to resume,” said Biden. Borrowers will not be required to make payments on their federal student loans until Jan. 1, 2023.

Who Is Eligible for Debt Relief?

Any loan disbursed before June 30, 2022, will be eligible for debt relief, including Graduate and Parent PLUS loans. The income threshold of $125,000 annually for individuals or $250,000 annually for couples filing jointly will be based on income reported in either 2020 or 2021. Current students are eligible for forgiveness if their parents’ household income is below the $250,000 threshold.

Of the 45 million Americans with student loan debt, 90 percent of the debt relief from today’s announcement will go to individuals earning less than $75,000 a year, according to the White House.

Pell Grant recipients, who have an average of $4,500 more in student loan debt than their peers who did not receive the federal grant for low-income students, will be eligible for up to $20,000 in student debt relief. Currently, 60 percent of the 43 million Americans with student loan debt received a Pell Grant while attending college, and an expected 27 million borrowers could benefit as a result.

The plan is expected to be especially impactful for low-income borrowers who accumulated some debt but did not finish their college degrees. These borrowers hold less debt, an average of around $15,000, compared to the national average of $37,000, but they do not have the same economic benefits of a college degree as college graduates with student debt.

Although Biden announced his debt relief plan today, it will be the Education Department that puts the plan into action. The department has the ability to automatically cancel the debts of around eight million borrowers who already have reported their income information as a part of income-driven repayment enrollment or the Free Application for Federal Student Aid; those borrowers will receive automatic forgiveness. Others will have to apply through an application.

Some supporters of debt relief urged the Biden administration to avoid the need for an application at all costs by not instituting an income cap. Biden said Wednesday that the application will be “short and sweet” and that it is currently in the process of being created by the Education Department. According to a fact sheet from the White House, the application will be available “no later than when the pause on federal student loan repayments terminates at the end of the year.”

“Every layer of complication that is added here and every additional administrative step that borrowers need to take makes it more likely that borrowers are going to fall through the cracks,” said Michelle Dimino, a senior policy adviser at the think tank Third Way. “It’s especially going to be borrowers who are at the lower end of the income distribution, so right now it’s really key, if the department wants to direct the bulk of this forgiveness to low- and middle-income borrowers who are struggling with their debt, that they make that application clear, that they make it easy to access.”

New Changes to Income-Driven Repayment

The Biden administration also proposed a new income-driven repayment plan that will cut monthly payments in half for those with undergraduate student loans. Under the proposal, monthly payments would be capped at 5 percent of an individual’s monthly income (it is currently set at 10 percent). Borrowers with both undergraduate and graduate debt will pay a weighted-average rate.

The new income-driven plan will also fully cover a borrower’s unpaid monthly interest and allow them to have their debts forgiven after 10 years, as opposed to 20, for borrowers with balances under $12,000, which the department says will allow nearly all community college borrowers to be debt-free in 10 years.

Biden said these changes could save eligible borrowers up to $1,000 annually.

Winning Support for the Plan

Some Democrats and civil rights groups have pushed Biden to cancel far more than $10,000 in student debt in order to address economic and racial disparities. Black college graduates hold $25,000 more in student debt than white college graduates.

Senate Majority Leader Chuck Schumer of New York and Senator Elizabeth Warren have pushed Biden to cancel up to $50,000 in student debt. The night before the announcement, Schumer even called Biden, asking him to go as far as possible on debt relief.

However, Schumer and Warren seem to be pleased with the president’s final plan. In a joint statement, they said, “With the flick of a pen, President Biden has taken a giant step forward in addressing the student debt crisis by canceling significant amounts of student debt for millions of borrowers.”

Although Biden did not go as big on debt relief as some had wished, many seem to be pleased that the president included Pell Grant recipients. Wisdom Cole, the national director of the Youth and College Division at the NAACP, who advocated for more than $50,000 in debt relief per borrower, called the inclusion of Pell Grant recipients a “racial justice lens” for student debt cancellation. Black students are more likely to have received Pell Grants.

On Tuesday, Derrick Johnson, president of the NAACP, and Cole wrote an op-ed in CNN that said canceling $10,000 of student debt “is like pouring a bucket of ice water on a forest fire. It hardly achieves anything—only making a mere dent in the problem.”

However, in a statement issued Wednesday, Johnson said, “President Biden’s announcement today, cancelling up to $20,000 for Americans across many generations, takes us one step closer to the NAACP’s ultimate goal of alleviating the burden of student debt. We’ve got a ways to go, but the NAACP is proud that we were able to push President Biden to exceed $10,000, bringing us closer to $50,000 and beyond.”

Cole said to Inside Higher Ed that “hopefully this is not the end of cancellation but the beginning of seeing more economic relief for those who are most impacted by the burden of student loans.”

Concerns Over Inflation

Some critics of debt relief have voiced concern over possible impacts on inflation as well as costs to the government. Biden said that the administration does not believe debt relief will have an impact on inflation because it will be followed by the resumption of repayment next year.

“We’re taking an economically responsible course, and as a consequence, about $50 billion a year will start coming back into the Treasury because of the resumption of debt [repayment],” said Biden. “Independent experts agree that these actions taken together will provide real benefits for families without meaningful effect on inflation.”

On Monday, former Treasury secretary Larry Summers took to Twitter, stating that he believed debt relief would be inflationary.

Criticism of the Biden administration’s handling of federal student loans heightened after a recent Government Accountability Office report found that the Education Department greatly underestimated the actual cost of the federal student loan program by $311 billion and it has cost the government $197 billion over the last 25 years.

The White House did not give a figure for the overall cost implications for Biden’s debt relief plan, which a senior official said was complicated to determine because it depends on how much debt is forgiven at the end of repayment. According to the Penn Wharton Budget Model, $10,000 of debt relief for borrowers making under $125,000 would cost the federal government $300 billion.

Republicans have long questioned the president’s legal ability to cancel student loan debt via executive fiat, calling it “legally dubious” and a waste of taxpayer dollars. House Republicans introduced a bill this month that would prevent the education secretary from issuing new regulations on student loans without permission from Congress.

Representative Virginia Foxx of North Carolina, the ranking member of the House Committee on Education and Labor, said, “President Biden will say and do anything to appease his radical progressive base, even if it means bankrupting our country and kneecapping taxpayers in the midst of an inflation crisis. This is a slap in the face to those who never went to college, as well as borrowers who upheld their responsibility to taxpayers and paid back their loans. It’s a signal to every freshman stepping foot on campus to borrow as much as they can because taxpayers are picking up the tab.”

In conjunction with the announcement on student loans, the Education Department released a legal memorandum that details the authority of the president to cancel student loan debt. Republicans have long challenged Biden’s authority to cancel student loan debt via executive action, as he did today. The memorandum states that the Higher Education Relief Opportunities for Students Act of 2003 grants the education secretary the legal authority to “effectuate a program of targeted loan cancellation directed at addressing the financial harms of the COVID-19 pandemic.”

“This move will not solve sky-high college tuitions. This will pour fuel on the fire, increasing college prices and accelerating inflation,” said Senator Richard Burr of North Carolina, the Republican leader of the Senate Committee on Health, Education, Labor, and Pensions. “It will encourage more schools to increase costs and encourage more students to take out loans they cannot pay back in the hopes they’ll never have to do so. The president knows he does not have the legal authority to unilaterally cancel student loan debt but is ignoring the law and bipartisan opposition in Congress.”

Biden’s Next Challenge

With debt relief set into action, many higher education leaders are calling on the Biden administration to address the issue of the rising costs of college that placed millions of Americans in debt in the first place.

The administration seems to be heading in that direction; a statement on the debt relief plan said, “The Biden-Harris Administration will keep fighting to reduce the cost of higher education by working to make community college free and doubling the maximum size of the Pell Grant.”

Biden also said in his address on debt relief today that “Twelve years of universal education is not enough.”

“I am gonna continue to fight for doubling the Pell Grant,” he said

Ted Mitchell, president of the American Council on Education, applauded the actions from the administration on Wednesday but also said, “To avoid forcing current and future students into the same debt morass, we must act in a comprehensive manner to modernize the federal student loan program. Congress, state legislatures, federal agencies, loan servicers and colleges and universities all bear responsibility for the problems plaguing the student loan program and all must contribute to the solutions.”