After months of rumor and speculation, President Joe Biden announced the details on a broad vision for student loan debt repayment and debt cancellation on Wednesday.
Through an executive order, federal student loan borrowers who meet income requirements will see $10,000 in debt canceled. If the borrower received a Pell Grant to attend school, the forgiven amount rises to $20,000.
About 43 million Americans have federal student loan debt. The White House says the plan cancels the full remaining balance for 20 million of them. Income requirements block relief for high-income households: Individuals must have earned less than $125,000 in the previous tax year, while married couples filing jointly must earn less than $250,000.
About 95% of borrowers will benefit from cancellation, Biden said in a speech Wednesday. And about 90% of the benefits of cancellation will go to borrowers who earn less than $75,000, the White House said.
“There’s a lot more work to be done, and tens of millions still have student loans, but for the estimated 20 million who will be debt-free, it will be life-changing,” says Mike Pierce, executive director and co-founder of the Student Borrower Protection Center, a nonprofit advocacy organization. “It shows that when people with student loans demand better from their government, the government listens to them, and that’s a good thing.”
The Biden administration also announced the seventh extension of payment forbearance. Borrowers with federal student loans have not been required to make payments since March 2020. If the forbearance isn’t extended past Dec. 31, borrowers will have gone 33 months without a payment.
Lastly, the Education Department proposed a new income-driven repayment plan that would reduce future payments and limit the growth of balances if payments are current.
But the plan doesn’t include all the details borrowers need to know.
“This is essentially a bare-bones announcement, so there’s still a lot of unanswered questions,” says Betsy Mayotte, president and founder of The Institute of Student Loan Advisors.
What we know and don’t know so far:
Whom will cancellation most benefit?
Roughly 15.2 million borrowers have debt under $10,000, according to federal data. About 1.38 million of those borrowers have been in repayment for longer than 20 years, according to an April 2021 data request to the Department of Education made by Sen. Elizabeth Warren (D-Mass.).
The impact of $20,000 in forgiveness for Pell Grant recipients is hard to gauge because of the income requirements borrowers must meet to be eligible. However, the White House estimates about 60% of borrowers received this aid. Pell Grants are available for low-income students, and the White House says the majority of students with Pell Grants come from families with incomes under $60,000 per year. These borrowers tend to have higher debt than non-Pell recipients, $4,500 more on average, according to the Institute of College Access and Success, a nonprofit organization.
“From a racial-equity perspective, targeting more relief to Pell Grant recipients goes a long way toward advancing racial equity, which we welcome, but we can always do more on that front,” says Kyle Southern, associate vice president of higher education quality at The Institute for College Access and Success.
About 23 million borrowers will have debt remaining, the White House estimates.
How can I apply for the forgiveness program?
Both the $10,000 and $20,000 forgiveness amounts are means-tested. But the Department of Education doesn’t have income information for all borrowers at the ready. It estimates nearly 8 million borrowers will be eligible for relief automatically based on the current information it has.
An application will be required to access the forgiveness and will be made available by the end of 2022. The department said it would be announcing further details on how borrowers can receive forgiveness in the weeks ahead.
“They want to give themselves time to implement this,” says Mayotte.
This red tape means borrowers could slip through the cracks. Some borrowers inevitably won’t follow through or will submit erroneously. Non-filers won’t qualify and others won’t be reached. The Education Department doesn’t have email addresses for 25% of borrowers in default, according to a January 2022 Government Accountability Office report.
“We are concerned that a lot of folks who may not be as aware or plugged in will slip through the cracks,” says Southern.
How soon will I get relief?
It’s unclear how quickly the Education Department will be able to deliver cancellation. It’s also quite possible, experts say, that there will be legal challenges to the executive order.
“This is something that might be struck down and never actually be implemented,” says Lanae Erickson, senior vice president for social policy, education and politics for Third Way, a nonpartisan think tank. “The timeline of all of this seems very rickety. There are going to be court challenges. If [Public Service Loan Forgiveness] has been any example, we know it’s going to take a while for people to be processed. It is not going to be instantaneous for borrowers to see this relief.”
The window for cancellation will be one year from the start date of the application process.
What if I owe more than $10,000 in federal loans?
Any amount you owe above $10,000 — or $20,000 if you qualify for relief as a former Pell Grant recipient — still remains. You’ll have to continue making payments on your debt. Payments are set to restart for all federal student loan borrowers after Dec. 31.
Those whose debt is not wiped clean now can pay off their remaining debts more quickly, reducing the amount of interest paid.
What if I already paid off my student loans?
The debt forgiveness only applies to borrowers with current existing federal student loans disbursed by June 30, 2022. There are no refunds.
I’m headed to college or a current student. Will my loans be forgiven, too?
Yes, but only on loans disbursed by June 30, 2022.
“Nobody should be taking out a student loan tomorrow because of what they heard today thinking it’s going to be forgiven,” says Mayotte.
I had a Pell Grant in college. How do I get relief?
Borrowers are eligible for up to $20,000 relief if they once received Pell Grants to attend school. It’s unclear exactly how these borrowers will need to prove this.
Will parent PLUS loans be included?
Yes, parents who took out PLUS loans to help their child attend college are eligible for forgiveness. It’s unclear if parents would qualify for Pell Grant-related relief if their child received a Pell Grant.
Are graduate loans included?
Yes, unsubsidized direct graduate loans and graduate PLUS loan debt are both included.
What if I have an FFEL loan?
Borrowers with Federal Family Education Loan debt owned by the government will see $10,000 in cancellation. But if your FFEL loan is commercially owned by a private company, it’s unclear if your loan will be eligible. Contact your loan servicer to determine which type of debt you have.
What if I have a private loan?
Private student loan borrowers will not see debt cancellation. If you’re having difficulty repaying your debt, contact your lender to find out what options are available, such as forbearance or temporarily lowered payments.
I have multiple federal loans. Which ones will be forgiven?
We don’t know this yet.
What if my loans are in default?
The Biden plan did not address cancellation for loans that are in default.
It has introduced a Fresh Start program that provides a path to good standing for 7.5 million borrowers but has not provided details on eligibility for cancellation for borrowers currently in default.
Will my forgiven debt be taxed?
Not at the federal level. A provision under the American Rescue Plan Act, signed into law by Biden in March, made any student loan debt forgiveness tax-free from December 2020 through Dec. 31, 2025. But that applies only to federal income taxes. Taxation at the state level could vary.
How will this change my monthly payment?
We don’t know this yet.
What if I can’t afford the remaining balance?
Receiving debt cancellation may have put a dent in your overall burden, but it doesn’t immediately help if you still can’t afford your monthly payment when the pause ends Dec. 31. Your best option is to contact your servicer about alternate repayment plans or an additional pause.
You could enroll in an income-driven repayment plan that sets your payments at a portion of your income and extends the length of time to repay your debt. Or you might need to take a payment pause entirely, though interest will still collect and be added to the total you owe when you restart payments.
What’s the deal with the new repayment plan?
The Education Department additionally revealed its new proposed income-driven repayment plan — a fifth plan to complement the four existing ones — to cap payments at 5% of a borrower’s income. It’s unclear when this new payment plan might go into effect.
The current most accessible income-driven repayment plan is called Revised Pay As You Earn, or REPAYE, and caps payments at 10% of a borrower’s income. After 20 or 25 years the remaining debt balance is forgiven.
The new rule would reduce the cap and lower the time to forgiveness to 10 years of payments for those who originally borrowed $12,000 or less to attend college. And it would fully cover the borrower’s unpaid monthly interest so a borrower won’t see their balance grow due to interest while they’re making regular payments.
Under existing income-driven plans, growing interest can make it difficult for borrowers to make a dent in their balance even while they’re paying each month.
Will my credit be affected?
Your total student loan debt does not negatively affect your credit scores as long as you make payments on time.
Some borrowers whose debt is eliminated could actually see a small decrease in their credit scores, which sometimes happens when a line of credit closes. The longer your credit history, the better, and your student loan might be your oldest credit account. If your student loan account closes, your credit history will be shorter and that can have a slight negative impact on your credit score.
However, most loan approvals are dependent on your debt-to-income ratio, not just your credit history. Debt-to-income ratio represents the total of your monthly obligations, divided by your monthly income.
If $10,000 in forgiveness eliminates a loan payment altogether, your DTI would improve. If it simply lowers your balance — but not your payment — your DTI would not improve.
The Biden administration and the student debt crisis
The move by Biden comes after many months of speculation and deliberation between his administration and Congress as to who has the power to cancel student loan debt, how much debt should be canceled — or if it should happen at all.
Student debt has been referred to as a crisis in the U.S. Between 1985-86 and 2017-18, college costs have grown 114%, adjusted for inflation, according to the most recent available data from the National Center for Education Statistics. Wages adjusted for inflation, meanwhile, have barely budged over the same period — just under a 19% increase, according to the Federal Reserve Bank of St. Louis.
Nearly two-thirds (62%) of college graduates in the class of 2019 had student debt, according to The Institute for College Access and Success. The average amount they owed was $28,950.
The Biden administration has prioritized correcting the shortcomings of existing forgiveness programs resulting in debt cancellation totaling $32 billion for 1.6 million borrowers. That includes:
$10 billion for more than 175,000 public servants through the Public Service Loan Forgiveness program.
$9 billion for more than 425,000 borrowers who have a total and permanent disability.
$13 billion for 1 million borrowers whose institutions defrauded them or closed before they could get their degree.