What It Means for You

If you’ve been sweating over resuming payments after the end of the federal student loan payment pause, many of you can rest easy. After years of deliberation, relief is finally here. President Joe Biden has unveiled his plan for student loan forgiveness.

The changes build on the Biden administration’s earlier moves to overhaul targeted relief programs like the Public Service Loan Forgiveness Program and the list of student loan discharge options.  

But now, he’s also finally living up to his campaign promise to forgive up to $10,000 for most borrowers (some will even get $20,000 in forgiveness) in addition to announcing another payment extension and an additional income-driven repayment plan. With so much student loan news and (even with the extension) so little time to decide what to do now, it’s vital to know what’s coming and how it will affect your student loans.

Biden Student Loan Announcement at a Glance

  • Cancels up to $10,000 per borrower ($20,000 for Pell Grant recipients)
  • Income cap of $125,000 (individuals) or $250,000 (households)
  • Student loan payment freeze extended through Dec. 31, 2022
  • A new income-driven repayment plan added

Student Loan Forgiveness Promised

On Wednesday, Biden announced the U.S. Department of Education will forgive up to $10,000 in student debt for individuals making less than $125,000 and households earning less than $250,000. (The caps are based on your tax filing status.)

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Additionally, those who received a Pell Grant to fund their education get up to $20,000 in forgiveness. Pell Grants are a type of financial aid given to students with the most need. However, they rarely cover the total cost of attendance. Thus, Pell Grant recipients usually borrow student loans.

The additional forgiveness for Pell Grant recipients and the income thresholds for debt forgiveness are both ways Biden is targeting middle-class and lower-income borrowers. The move is likely in response to concern on both sides of the aisle that widespread forgiveness would primarily benefit higher-income earners.   

Current borrowers are eligible for relief if their loans originated before July 1, 2022.   

Student Loan Payment Pause Extended

In addition to unveiling his plan for widespread loan forgiveness, Biden announced another extension of the student loan repayment pause through Dec. 31, 2022. Biden says this will be the final extension. Although he’s said that before, it will likely hold this time since he’s now unveiled his plan for student loan relief.

Income-Driven Repayment Plan Added

President Biden also announced plans to add a new income-driven repayment plan. The new program will:

  • Set monthly payments on undergraduate loans at no more than 5% of a borrower’s discretionary income (the previous payment cap was 10%)
  • Use a more generous calculation based on 225% of the poverty level (rather than the previous 150%) to determine discretionary income 
  • Cover the borrower’s unpaid interest so their balance won’t grow (a huge problem with previous programs known as negative amortization)
  • Forgive any remaining balances less than $12,000 after 10 years (rather than the standard 20)

More details on the repayment plan are forthcoming. But so far, there appears to be no plan to help graduate loan borrowers with lower incomes, such as teachers, social workers, and public defenders.

What Biden’s Announcement Means for Borrowers

You probably have a lot of questions about what this means for you. Additional details are pretty sketchy as of now, but the general consensus is that you can take the announcement at face value. But we’ll update the answers to these questions as we get more information.

 Who Qualifies for Forgiveness?

All federal direct student loan borrowers, including grad and parent PLUS loan borrowers, are eligible.

How Much Can I Get Forgiven?

Biden’s plan to forgive up to $20,000 per borrower means that if your balance is less than the proposed amount, you might be done paying your student loans. Note the language “up to” means that if you owe less than the proposed forgiveness amount, the government will forgive your remaining balance, but you won’t get a credit.

For example, if you owe $15,000 and didn’t receive a Pell Grant, you’ll get $10,000 canceled but still owe $5,000. If you were a Pell Grant recipient, you’ll get your entire $15,000 balance forgiven. But you won’t get a check for the $5,000 difference.

How Do I Get Forgiveness? 

You may get your forgiveness automatically if the Department of Education already has your income information. But you may have to fill out an application. The application isn’t ready yet, but it will be by the end of the year. If you subscribe to the Department’s email list, they’ll keep you posted. 

How Do I Know if I Got a Pell Grant?

If you’re a Pell Grant recipient, you won’t have to prove whether you received one because they already have that information (the government gave you the grant). If you can’t remember if you’ve ever received a Pell Grant, you can find that out by logging into your account at StudentAid.gov.

Does the Amount of my Pell Grant Influence the Amount of Forgiveness?

Not that the government has announced. The Pell Grant maximum changes (increases) yearly, but it’s not usually enough to pay for school in any year. In any case, the amount you received would be based partially on that year’s maximum rather than solely on need.

What if I Still Owe Money After the Forgiveness or Didn’t Qualify?

If you aren’t eligible for forgiveness or the forgiveness amount doesn’t eliminate your debt, student loan payments will resume in January 2023. 

Additionally, borrowers were originally told it’s a good idea to hold off on making student loan payments until we know Biden’s plans. Now that we know them, you may want to start working on paying off any balance above the proposed forgiveness amount while the interest rate is still 0%

Or you can wait to pay your loans and use your money to build emergency savings or grow your retirement investments. Both choices are sound financial ones. It just depends on your situation and goals. 

What’s Next?

While President Biden’s announcement is initially exciting, it isn’t time to breathe a sigh of relief yet. 

The Biden administration deliberated extensively on whether he had the legal authority to cancel some student loan debt. That includes a legal opinion from the Justice Department that concludes the Higher Education Relief Opportunities for Students Act gives the education secretary the authority to reduce or eliminate federal student loan debt. 

Still, his plan is likely to face legal challenges. Many Constitutional provisions, federal laws, and legal precedents require federal agencies to collect outstanding debts.

Additionally, most democratic lawmakers support Biden’s plan, even if some wish it had gone further. But he’s likely to face pushback from Republican lawmakers. It’s also likely the plan will face lawsuits from lenders and student loan servicers who may no longer be able to collect on certain debts. 

Thus, the survival of Biden’s plan in the federal court system is unknown. So you may have to delay the celebration until the forgiveness plan is legally final.

Final Word

The proposed cancellation amount will wipe out the student loan debt of 20 million people, or 45% of all federal student loan borrowers, according to White House estimates.

But although widespread student loan forgiveness sounds terrific on paper, like many government policies, it doesn’t go far enough to help the other 55%, many of whom are graduate loan borrowers.

The Department of Education needs to go further to help lower-income graduate borrowers and parent borrowers. That means immediately restoring bankruptcy protections to student loans.

Widespread forgiveness also does nothing to address college affordability. If things remain as they are, future borrowers may need similar relief, especially since the rising cost of tuition forces students to borrow more and more from a broken lending system with every passing year.

For more on the desperately needed fixes, see our article on whether the federal government should forgive student loans.

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