Biden student loan forgiveness: Everything to know
Millions of borrowers faced once again handing over $300 a month or even more to cover their federal student loan debt beginning Sept. 1.
Now, never mind.
Before noon Wednesday, the U.S. Department of Education announced that the payment pause on many federal student loans has been extended through Dec. 31 and called the move a “final extension.”
Beginning in January, borrowers will need to resume paying their federal student loan bills that were covered under pandemic-related relief efforts. We're looking at the seventh such extension since the moratorium began in March 2020.
The Wednesday announcement included a long-awaited student loan forgiveness program and a proposal to create a new income-driven repayment plan that will substantially reduce further monthly payments for lower-income and middle-income households.
Under the forgiveness plan, borrowers with an annual income during the pandemic of under $125,000 for individuals – or under $250,000 for married couples – would be eligible for up to $20,000 in debt cancellation if they received a Pell Grant in college.
But only up to $10,000 in federal student loans would be eligible to be forgiven if the students didn’t receive a Pell Grant but met the same income limits.
Further details on how to claim this debt relief will be answered by the Education Department in future weeks. Nearly 8 million borrowers may be eligible to receive relief automatically, according to the announcement, because relevant income data is already available to the Department of Education.
Millions of borrowers have been on edge and unclear about what is next the closer we get to Aug. 31 when the moratorium is set to expire. Some have gotten confusing emails and phone alerts.
Other Democrats had called for forgiving $50,000 in federal student loans. But President Joe Biden did not move that far.
Private student loans aren't covered. So borrowers still have to pay those. And some will not see even one penny of their federal student loan debt vanish, either.
What's in the works for student debt forgiveness?
More than 43 million people have federal student loan debt in the United States. The average borrower has about $37,000, according to data compiled by the Education Data Initiative. The outstanding federal loan balance is about $1.6 trillion.
About $53.3 billion in federal student loan debt is held by 1.4 million borrowers in Michigan, according to Department of Education data. That data is for outstanding principal and interest balances.
While many are thankful for student loan forgiveness, plenty of anxiety and frustration remains about how exactly such a program will look.
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"If there is an income cap, we are concerned about the borrowers who will be left out," said Persis Yu, policy director and managing counsel for the advocacy group Student Borrower Protection Center, on Tuesday afternoon before the announcement.
"Income does not equal wealth," she said.
One after all, could be making $45,000 a year after college and have some student loan debt but at the same time still benefit from family wealth that has enabled the college graduate to have no credit card debt or other financial burdens.
Income is an imprecise measurement, Yu maintained, to determine the group of people who are most in need of student loan relief.
Yu noted that's especially the case when you consider the racial wealth gap and the disproportionate burden that Black and Latino student loan borrowers face.
Low-income borrowers also could face hurdles getting relief, she said, depending on what kind of administrative burden is put in place to apply for student loan debt relief.
"We hope that if there is a cap or means test, that relief will be delivered as automatically to as many people as possible," Yu said.
Many times, those who owe far smaller amounts had to drop out of school and did not receive the financial benefits of a college degree.
Yu said cancellation will disproportionately benefit borrowers in default and $10,000 of cancellation could eliminate the balances of up to 50% of those borrowers.
"For these borrowers, this benefit will be life-changing — eliminating the threat of wage garnishment and seizure of Social Security benefits and the Earned Income Tax Credit," Yu said.
Many borrowers, she said, would be closer to resolving their student debt.
Even so, she said, "more relief is needed to help address the racial wealth gap, which leaves student loan borrowers of color with higher debt amounts and disproportionately in default."
Much speculation was building this week about when Biden could roll out an announcement relating to student loan forgiveness.
The extent of help many people will see depends a great deal on those income limits.
If $10,000 in federal student loans is forgiven per borrower without an income cap, said Mark Kantrowitz, a student loan expert and author of "How to Appeal for More College Financial Aid," a third of borrowers would have their federal student loan debt completely erased. This includes many borrowers who dropped out of college.
But if a $125,000 income cap is added per borrower, he said only a quarter of federal student loan borrowers would see their federal student loan debt completely erased by a the forgiveness program.
The estimates for how many would see their entire debt vanish, Kantrowitz said, are based on the total loan balance, including principal and interest.
"When the government wipes out debt," he said, "the forgiveness is applied to the loan balance, which may include interest in addition to principal."
For example, if you have a $5,000 federal student loan with $10,000 in accrued but unpaid interest, the total loan balance would add up to $15,000.
A loan forgiveness program that covers $10,000 would reduce your loan balance to $5,000.
"Generally, the payment application order applies payments first to interest and next to principal, but they might do things differently with the loan forgiveness," Kantrowitz said.
Some student loans already forgiven
Many people, of course, have seen some of the federal student loans forgiven under special circumstances.
The Biden administration already has forgiven about $32 billion in federal student loans in various initiatives that ended up covering about 1.6 million borrowers. This includes $13 billion related to institutions that took advantage of borrowers, according to the U.S. Department of Education.
On Aug. 16, for example, another loan forgiveness program was announced involving federal student loans that borrowers received to attend ITT Technical Institute from Jan. 1, 2005, through ITT's closure in September 2016.
The news applied to 208,000 borrowers who held $3.9 billion in student loans that were taken out to attend ITT. The loans will be discharged without any additional action.
"ITT defrauded hundreds of thousands of students, as we identified when I was the director of the Consumer Financial Protection Bureau," Richard Cordray, federal student aid chief, said in a statement.
"By delivering the loan relief students deserve, we are giving them the opportunity to resume their educational journey without the unfair burden of student debt they are carrying from a dishonest institution."
What we don't know yet
The nitty gritty details weren't known yet as of Tuesday — such as any effective date for determining whether you meet an income threshold. Or how you'd prove you met a threshold and qualified for relief.
At one point, the speculation was that federal student loan debt forgiveness might apply only to borrowers earning less than $150,000 if single or $300,000 for married couples.
But the latest reports indicate that the income threshold could be lower and around $125,000 per borrower.
When will student loan payments need to resume?
The odds are good now that another payment extension will be granted soon.
"Given that the required notices have not been sent, they can't restart repayment in September," said Kantrowitz on Tuesday.
The Coronavirus Aid, Relief and Economic Security Act — known as the CARES Act and passed in March 2020 — requires the U.S. Department of Education to send at least six notices starting at least two months before the restart of those student loan payments that had been put on hold, Kantrowitz said.
Some late alerts have been sent out, including one sent by Nelnet claiming that payments would automatically be taken out of the bank accounts of borrowers on Sept. 1. But those emails were reportedly sent out by mistake.
Loan servicers had been instructed by the federal government about a month ago to not contact borrowers about resuming payments, according to an industry leader.
Student borrowers have seen one extension after another. At various points in 2022, the repayments could have resumed on Feb. 1, then May 1 and then Sept. 1.
The latest extension means about 18 million borrowers will have gone nearly three years without being required to make a student loan payment.
Almost 60% of college borrowers — or 11.5 million borrowers — holding federal student loan debt who qualified for the pandemic freeze did not make any payments on those student loans from August 2020 through December 2021, according to data released in a May 27 report from the Federal Reserve Board of Governors.
The average monthly payment was $260, according to the Fed report.
Under the moratorium, payments on most federal student loans were suspended, a 0% rate was charged on outstanding balances and collections were stopped on defaulted loans.
Kantrowitz said it would be "political suicide for the Democrats to restart repayment two months before an election."
While the jobs picture has been extremely strong, many families aren't on a sturdy financial footing after job losses hit during various parts of the pandemic and inflation drove up the cost of everything from food to gas to rent to utilities.
Many families are taking on more credit card debt, including borrowing to cover basic bills.
Gen Z consumers -— ages 24 and younger now — in particular took on more credit, as more younger consumers and borrowers with lower credit scores gained access to credit cards this year, according to data from TransUnion.
The average credit card debt per borrower, according to TransUnion data, rose to $5,270 in the second quarter, up from $4,817 for the same period a year ago. In the second quarter of 2019 before the pandemic, consumers had been carrying an average of $5,635 in credit card debt.
What should you do if you're looking at another extension for not having to pay down student loan debt each month?
Using extra cash to pay down high cost credit card debt makes sense right now, especially since no discussions are in play for forgiving credit card debt.
Or you may want to set aside what you would normally pay for monthly student loan payments to make room in your budget for the day when payments resume.
Kantrowitz said there's no advantage to paying down the debt on federal student loans during the student loan moratorium since no new interest is accruing.
"You can wait until the restart of repayment to make a lump sum payment," he said. "Or use the money you saved to ease your way into repayment."
Most student loan borrowers shouldn't bank on seeing all of their student loan debt forgiven one day.
Contact Susan Tompor: stompor@freepress.com. Follow her on Twitter @tompor. Read more on business and sign up for our business newsletter.
This article originally appeared on Detroit Free Press: Biden student loan forgiveness: Everything to know
