After months of internal debate, President Biden announced a three-part plan on August 24, 2022, to provide additional student loan relief. Currently, more than 40 million Americans owe more than $1.7 trillion of educational debt, a balance that far exceeds outstanding credit card or auto debt, and many are struggling. Only about half of borrowers were repaying their loans in 2019, more than 10 million were in delinquency or default, and even more had applied for temporary relief including deferments and forbearances.

Targeted Debt Relief

Under this plan, the Department of Education (DOE) will cancel up to $20,000 of debt for borrowers with Pell Grant loans, and up to $10,000 for borrowers with other types of student loans, but only for those whose income was less than $250,000 (married), or $125,000 (single), during either 2020 or 2021. This debt forgiveness is tax-free and available only to those with federal loans (which represents 90% of the outstanding student loan debt) from undergraduate and graduate programs, as well as Parent Plus loans.

This action will positively impact most of the 40 million borrowers with student loan debt and will completely wipe out the debt for about 15 million borrowers. The non-partisan Penn Wharton Budget Model estimates that this debt forgiveness plan will cost the government (taxpayers) more than $300 billion over the next 10 years, soaking up all the projected budget deficit reduction under the recently enacted Inflation Reduction Act. In effect, the forgiven loan repayments have been transferred to U.S. taxpayers.

Payment Pause Extended

Biden also extended the pause on student loan payments through December 31, 2022. Interest rates will remain at 0%, no payments will be due, and all debt collection efforts will be suspended during this period, helping borrowers save an average of $400 a month, or about $5 billion a month collectively, according to the DOE.

Monthly Payments Reduced

Under the plan, borrowers making less than 225% of the federal poverty level will not be required to make any payments on their undergraduate loans. Furthermore, borrowers enrolled in an income driven repayment (IDR) plan will see their monthly payments halved from 10% to 5% of their discretionary income. Also, loan balances will be forgiven after 10 years of payments (down from 20 now) for borrowers with original loan balances of $20,000 or less.

The Public Service Loan Forgiveness (PSLF) program will also be enhanced to ensure that borrowers who have worked at a nonprofit, in the military, or in a federal, state, tribal or local government, receive appropriate credit toward loan forgiveness. These improvements add to the temporary changes that DOE has already made to this program, under which more than 175,000 borrowers have had more than $10 billion in loans forgiven. 

The DOE plans to release more details on how borrowers can claim relief under this plan in the coming weeks.

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