President Joe Biden’s long-awaited student loan debt relief plan was finally unveiled on Wednesday, while also announcing that the moratorium on federal student loan repayments that was set to expire at the end of August has again been extended—this time until January 2023, when repayment requirements will be enforced with no further extension in the works.
Among the key facts in Biden’s three-part plan outlined in a Fact Sheet released Wednesday are that the Department of Education will provide up to $20,000 in debt cancellation to Pell Grant recipients with loans held by the Department of Education, and up to $10,000 in debt cancellation to non-Pell Grant recipients. Borrowers are eligible for this relief if their individual income is less than $125,000 ($250,000 for married couples).
“I believe my plan is responsible and fair. It focuses the benefit on middle-class and working families, and will help both current and future borrowers, and will fix a badly broken system.”
President Joe Biden
The White House points out that no high-income individual or high-income household—in the top 5% of incomes—will benefit from this action. 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.
“I made a commitment that we would provide student debt relief. And I’m honoring that commitment today,” Biden said during a press conference announcing the program. “I understand not everything I’m announcing today is going to make everyone happy. Some think it’s too much… Some think it’s too little. But I believe my plan is responsible and fair. It focuses the benefit on middle-class and working families, and will help both current and future borrowers, and will fix a badly broken system.”
The “fixes” for the “broken system” Biden refers to include—per the White House Fact Sheet:
• A new income-driven repayment plan that protects more low-income borrowers from making any payments and caps monthly payments for undergraduate loans at 5% of a borrower’s discretionary income—half of the rate that borrowers must pay now under most existing plans.
• Fixing the broken Public Service Loan Forgiveness (PSLF) program by proposing a rule that borrowers who have worked at a nonprofit, in the military, or in federal, state, tribal, or local government, receive appropriate credit toward loan forgiveness.
• Protecting future students and taxpayers by reducing the cost of college and holding schools accountable when they hike up prices. To further reduce the cost of college, Biden said he will continue to fight to double the maximum Pell Grant and make community college free.
The big picture
The White House Fact Sheet notes that since 1980, the total cost of both four-year public and four-year private college has nearly tripled, even after accounting for inflation. Federal support has not kept up: Pell Grants once covered nearly 80 percent of the cost of a four-year public college degree for students from working families, but now only cover a third. That has left many students from low- and middle-income families with no choice but to borrow if they want to get a degree. According to a Department of Education analysis, the typical undergraduate student with loans now graduates with nearly $25,000 in debt.
The White House says skyrocketing cumulative federal student loan debt—$1.6 trillion and rising for more than 45 million borrowers—is a significant burden on America’s middle class. Middle-class borrowers struggle with high monthly payments and ballooning balances that make it harder for them to build wealth, like buying homes, putting away money for retirement, and starting small businesses.
The Department of Education estimates that roughly 27 million borrowers will be eligible to receive up to $20,000 in relief. Current students with loans are also eligible for this debt relief. Borrowers who are dependent students will be eligible for relief based on parental income, rather than their own income.
If all borrowers claim the relief they are entitled to, the White House says the actions will provide relief to up to 43 million borrowers, including cancelling the full remaining balance for roughly 20 million borrowers.
Notably, this debt relief will not be treated as taxable income for the federal income tax purposes in accordance with the American Rescue Plan.
The Department of Education will set up a simple application process for borrowers to claim relief, which 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.
The White House said more information on claiming relief will be made available to borrowers in the coming weeks. Borrowers can sign up to be notified when this information is available at StudentAid.gov/debtrelief.
Pause extended one final time
Notably, today’s announcement brings absolute clarity to when the federal student loan repayment pause will officially end. The pause was first instituted by the CARES Act in 2020 as a result of the COVID-19 pandemic, and has since been extended several times—most recently by Biden in April 2022, when he extended it through Aug. 31.
Now, the White House has stated firmly that repayment of federal student loans will restart as of Jan. 1, 2023.
“To ensure a smooth transition to repayment and prevent unnecessary defaults, the pause on federal student loan repayment will be extended one final time through December 31, 2022. Borrowers should expect to resume payment in January 2023,” the White House said.
Reactions to the plan
The student loan forgiveness issue has long seen progressive Democrats urging President Biden to be more aggressive in canceling debt while Republicans are unanimously opposed to the concept.
Texas Republican Senator Ted Cruz—a longtime opponent of student loan forgiveness—was quick to tweet his displeasure with the Biden’s announcement.
“Democrats’ student loan socialism is a slap in the face to working Americans who sacrificed to pay their debt or made different career choices to avoid debt. A wildly unfair redistribution of wealth toward higher-earning people.”
Senate Minority Leader Mitch McConnell (R-KY)
“Insane – and illegal!” Cruz tweeted on Wednesday. “We have the highest inflation in 40 years/highest gas prices ever, but Biden wants to spend even more at the expense of hard-working Americans. The middle class will be stuck with the bill – it’s debt transfer. This is just a Hail Mary before midterms.”
Senate Minority Leader Mitch McConnell (R-KY), also an opponent of debt relief, said in a statement on Twitter, “Democrats’ student loan socialism is a slap in the face to working Americans who sacrificed to pay their debt or made different career choices to avoid debt. A wildly unfair redistribution of wealth toward higher-earning people.”
On the other side of the aisle, Massachusetts Sen. Elizabeth Warren, who has urged Biden to cancel up to $50,000 in student loan debt, called today a day of joy and relief.
“Make no mistake. This is one of the biggest acts of consumer debt relief in American history, and it will directly help hard-working people who borrowed money to go to school because they didn’t come from a family that could write a big check,” Warren tweeted Wednesday.
Industry players are also chiming in, including , Betterment at Work General Manager Kristen Carlisle.
“President Biden’s student loan forgiveness is a step forward, but it barely makes a small dent in the $1.7 trillion Americans currently owe in student debt. People across all ages still have to cope with the stress that comes with resuming student loan payments while they’re still stabilizing themselves after economic uncertainty since the start of the pandemic,” Carlisle said. “It has become increasingly important to help employees take control over their student debt and feel financially empowered. As more individuals are faced with the moratorium ending, now is the moment when they need the most help.”
Carlisle said employers can step up by matching student loan payments as the moratorium on student loan repayment ends, or by offering a student loan management solution as part of their broader financial wellness package.
“Supporting employees with their debt, whether it’s through direct contributions or tools to make payments simpler and more manageable, is becoming increasingly expected and shows their employers are investing in their long-term financial future,” Carlisle said.
SEE ALSO:
• Biden Extends Student Loan Repayment Pause to September
• Betterment Launches Student Loan Management Tool, Enters 529 Space
• Biden Extends Student Loan Repayment Pause, Pushes Workplace Solutions
• Student Debt and Employee Benefits: What Plan Advisors Need to Know