President Joe Biden delivered a win-win for student loan borrowers.
The president on Wednesday announced the federal government will forgive $10,000 in student loan debt for individuals who make less than $125,000 and for households that earn less than $250,000, according to a tweet from the president's official account. An additional $10,000 in forgiveness goes to those who received need-based Pell Grants.
Biden also extended the pandemic forbearance on federal student loans to December 31, helping those who didn't make the forgiveness cut or who would still have an outstanding balance after forgiveness. The administration also laid out other steps to reduce the education cost burden for existing and future borrowers.
The latest move delivers on Biden’s campaign promise for student debt relief and could help up to 43 million borrowers, according to the administration.
An erasure of $10,000 for all borrowers with federally-backed loans would cost roughly $371 billion and eliminate loans for about a third of borrowers. While the $125,000 income cap reduces the cost and scope, 90% of the relief goes to households with $75,000 in yearly income or less, according to figures from the Department of Education.
"No individual making more than $125,000 or household making more than $250,000 – the top 5% of incomes in the United States – will receive relief," the fact sheet provided by the administration stated.
With $10,000 in forgiveness, “you're going to reach a lot more borrowers that are at significant risk of default,” Antoinette Flores, director of postsecondary education at the Center for American Progress (CAP), told Yahoo Finance. “We know that the majority of borrowers who ended up defaulting have debt below $10,000.”
The additional $10,000 for Pell Grant recipients also further helps the more finanially vulnerable. According to the administration fact sheet, Pell Grant recipients account for more than 60% of the borrower population and nearly all come from a family that earns less than $60,000 a year.
"The potential of an extra $10,000 worth of forgiveness for some Pell Grant Recipients was unexpected, but it makes sense given that it directly targets lower income borrowers and runs contrary to the narrative that student loan forgiveness is a 'handout to the rich,' as some have argued," Jacob Channel, senior economist at Student Loan Hero, said in a statement.
Additionally, Biden is extending the payment pause to the end of the year. The relief originally was set to expire on August 31. The extension will provide temporary relief for the remaining borrowers who are ineligible for forgiveness or who will receive limited relief from the elimination of $10,000 in debt.
The pause is the final extension after originally enacted by former President Donald Trump at the beginning of the pandemic in March 2020 to help borrowers who were facing financial troubles such as job loss or furloughs.
It has been extended seven times collectively by both administrations, and some experts said it was necessary to extend forbearance again this time around as borrowers and servicers were not ready to begin repayment.
"In keeping with my campaign promise, my Administration is announcing a plan to give working and middle class families breathing room as they prepare to resume federal student loan payments in January 2023," the president tweeted.
The Education Department is also proposing a rule to cap monthly payments for undergraduate loans at 5% of a borrower’s discretionary income, which is half the rate borrowers pay now under most plans. That will reduce the average annual student loan payment by more than $1,000 for both existing and future borrowers, according to the administration.
The department will also propose forgiving loan balances after 10 years of payments — instead of 20 years — for borrowers who had original loan balances of $12,000 or less, which would especially help borrowers who attended community college.
Another move will be to fix the troubled Public Service Loan Forgiveness (PSLF) program that provides student debt forgiveness for borrowers after working at least 10 years in public service jobs with federal, state, local, or certain non-profit organizations.
How will forgiveness be administered?
A big concern is how loan forgiveness will be processed and administered considering the $125,000 individual income cap and $250,000 household income cap on their 2020 or 2021 tax return.
The Education Department is in charge of administering the program and will have an application available to borrowers before the federal forbearance expires on December 31. Borrowers can sign up for notifications on the dedicated Federal Student Aid Debt Relief website.
For the 8 million borrowers whose income data is already in the Education Department database, they may see automatic relief. For borrowers whose data isn't readily available, there may be delays to verify income.
“People who need the relief will end up not getting benefits because of paperwork delays, similar to public service loan forgiveness (PSLF) applicants experiencing problems with denials," Katherine Lucas McKay, associate director of research at Aspen Institute’s Financial Security Program, told Yahoo Money. "PSLF borrowers have to certify their income with the IRS, who then sends an automated notification to the Education Department of income based on current year tax return based on individual income."
Currently, the IRS has a 21 million backlog of unprocessed paper returns, an eight-month backlog in processing taxpayer correspondence, and a hiring shortage.
Ronda is a personal finance senior reporter for Yahoo Money and attorney with experience in law, insurance, education, and government.