Student loan forgiveness

Breaking down the Biden student loan forgiveness plan

Money, News

Here are the Biden administration’s current policies related to student loan forgiveness:

  • $1.3 billion worth of student debt has been forgiven for those permanently disabled and unable to work
  • ‌$1 billion of debt forgiveness for students that had been defrauded by schools
  • ‌Pause on federal payments and collections until September 31, 2021
  • ‌Zero-interest on outstanding federal loans until September 31, 2021
  • ‌Eliminated the need to report student loan forgiveness as income through 2026

‌No decision has been made on how to address the record $1.7 trillion of debt for the remaining 45 million people that owe money on their federal student loans. This leaves many wondering if the Biden administration will forgive student loans or whether it plans some other form of debt relief.

$1.3 billion in student loan debt forgiveness

The Biden administration has announced plans to provide additional student debt relief for those in default. This would impact roughly 41,000 people and involve the forgiveness of more than $1.3 billion in loans.

The announcement made big headlines, but students worried about their loans shouldn’t be celebrating just yet.

These loans had already been forgiven once, for people that are totally and permanently disabled. Those affected were required to demonstrate their income remained below the government-set minimums. Nearly a quarter-million people — 94% of the eligible — failed to turn in the paperwork necessary to make it permanent.

This plan at once reinstates the loan forgiveness program for those disabled and in default and makes it retroactive to March 2020. It also eliminates the proof-of-income requirement.

$1 billion in student loan debt forgiveness

This move came shortly after the Biden administration canceled $1 billion in student debt for borrowers claiming their schools had intentionally deceived or defrauded them. It impacted some 73,000 borrowers.

Student loan interest paused

The CARES Act passed during President Trump’s tenure paused payments and collections on student loans and kept interest rates at 0% through September 2020. It was later extended to January 31, 2021. Following his inauguration, President Biden extended the pause through September 31, 2021.

When it comes to defaulting on loans, a third of four-year school students and 41% of students at two-year schools wind up in default.

Biden’s pre-election proposal also provided parents and students a way to limit debt. It included a proposal to provide two years of community college (and certain other training programs) without debt. He proposed that the federal government would pay 75% of the tuition costs while states would cover the rest in most cases.

President Biden also lent his support to tuition-free — and loan-free — education for students attending public colleges and universities in families earning less than $125,000 annually.

The Biden student loan forgiveness plan

Still, no formal announcement has been made to tackle the broader debt.

Top congressional Democrats have called for President Biden to use his executive authority to forgive $50,000 in federal student loans for individuals. Two such resolutions have been introduced in the House and 17 state attorneys general have asked the Biden administration to issue an Executive Order, asserting that the President has the authority as part of the Higher Education Act.

Thus far, President Biden has stated that he wants to limit it to $10,000 per student, arguing that the government shouldn’t be in the business of forgiving debt for students that racked up significant liabilities while attending expensive colleges such as Ivy League institutions or private schools.

The most recent pandemic relief bill, however, may have signaled the administration’s intention to approach student debt relief on broader terms. Student loans that are canceled remove the obligation to pay them back, but they were treated as income and taxable. In addition to $1,400 individual stimulus checks, the pandemic relief bill included a provision making debt forgiveness for student loans tax-free until 2026.

The impact of forgiving $10,000 

If the Biden student loan forgiveness plan offers $10,000 in debt cancellation, here’s how it’s likely to play out.

Nearly a third of students owe $10,000 or less on their loans. They are the most at risk of default, according to Institute for College Access and Success (TICAS). It reports that 52% of those defaulting on student loans owe less than $10,000.

Federal data shows that 7.9 million owe less than $5,000 while 7.4 million owe between $5,000 and $10,000. All of these loans would be canceled. 

The average student debt at graduation is $25,921, so Biden’s loan forgiveness plan would still leave significant debt obligations for the majority of students. Approximately 82% of students, or 36 million people, have student loan obligations above $10,000. 

If the congressional plan is approved and forgives student debt up to $50,000, significantly more people would have their loans canceled. Roughly 17% have student loan debt above the $50,000 mark.

In either case, only federal loans would be forgiven. Private student loans would not be canceled.