President Joe Biden tweeted Wednesday what many have been waiting for months — a plan to forgive or reduce student loan debt for millions of borrowers.
If you make less than $125,000 a year, he said you’re eligible to get a cancellation of up to $10,000 in student loans. If you received a Pell grant, you can get up to $20,000 forgiven. If you don’t qualify for student debt forgiveness, your suspension of payments continues to be suspended until the end of the year. The Ministry of Education is also working on a proposal that introduces a new repayment plan to ease the burden on borrowers.
Since the start of the pandemic in 2020, borrowers have not had to pay a single cent on their student loans. During that time, pressure has mounted for the president to simply cancel the debt. It was one of the platforms on which Biden ran for president in 2020.
While the plan will be welcomed by many, it will likely garner criticism. Many had asked for higher forgiveness amounts – $50,000 or even the entire amount, no matter how large. The total outstanding balance for federal student loans (including defaulted) student loans as of December 2021 was $1.38 trillion, the Federal Reserve Bank of New York said in April.
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What is Biden’s student loan forgiveness plan?
Individuals with an annual income of less than $125,000 (or less than $250,000 for married couples or heads of households) are eligible to have up to $10,000 in federal student loans forgiven. No private loans will be forgiven.
Those who also received a Pell grant in college will be eligible for up to $20,000 in debt forgiveness.
For those who still have student debt, the repayment freeze from March 2020 will be extended until the end of the year. Borrowers will resume payments in January 2023.
What is a Pell Grant?
Federal funding typically awarded only to undergraduate students who demonstrate exceptional financial need and have not earned a bachelor’s, master’s, or professional degree. Sometimes, a student enrolled in a post-baccalaureate teacher certification program may receive a Pell Grant.
Unlike a loan, a Pell grant does not have to be repaid, except in certain cases where some or all of it may have to be repaid. Some circumstances include a change in enrollment status or if you received scholarships or grants that reduced your need for federal student aid.
How do people apply for student debt forgiveness?
The Department of Education will announce details at 2:15 p.m. EDT. and the following weeks. The application will be available no later than Dec. 31, when the federal student loan repayment moratorium ends.
Nearly 8 million borrowers may be automatically eligible to receive relief because relevant income data is already available to the Department of Education.
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What is the cost of student loan forgiveness?
A one-time maximum debt cancellation of $10,000 per borrower would cost about $300 billion for borrowers with incomes of less than $125,000, according to an analysis published Tuesday by Junlei Chen and Kent Smetters at the Penn Wharton Budget Model, based at the University of Pennsylvania . That cost rises to $330 billion if the program continues over its typical 10-year budget.
Before the announcement, the Government Accountability Office estimated that the suspension of payments alone since the start of the COVID-19 pandemic has cost the government $102 billion. This amount included the suspension of all payments due, accrued interest and involuntary collections on defaulted loans from March 13, 2020 to August 31, 2020.
Who benefits most from the student debt relief plan?
Mainly higher income households. Between 69% and 73% of debt written off is concentrated among households in the top 60% of the income distribution, Chen and Smetters reported.
A New York Federal Reserve study in April, however, said the income limit on forgiveness “significantly reduces the cost of student loan forgiveness and increases the share of the benefit that goes to borrowers who are most likely to struggle to repay their debts ».
For example, a $75,000 income cap for a $10,000 cancellation increases the share of loan dollars going to borrowers in low-income neighborhoods to 35% from 25%, and the share going to borrowers with lower credit scores to 42% from 37% , he said. The income caps also increase the share of loans granted that were overdue before the pandemic to 60% from 34%.
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How many Americans have outstanding student loans?
More than 43 million people have outstanding federal student loans, according to the Education Data Initiative, which collects data and statistics about the U.S. education system.
The total outstanding balance for federal student loans (including defaulted) student loans as of December 2021 was $1.38 trillion, the Federal Reserve Bank of New York said in April. Most (67%) student loan borrowers are under 40, yet only 57% of the rest are owed by people under 40. That means those with larger balances are more likely to be older, likely due to borrowing for graduate school. he said.
The White House estimates that its initiative will cancel the entire balance for about 20 million borrowers.
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What is the average amount of student loan debt?
The average federal student loan debt balance is $37,667, while the total average balance (including private loan debt) can be as high as $40,274, the Education Data Initiative estimates.
Are there any tax consequences to receiving the forgiveness?
The debt relief doesn’t count as taxable income for federal income tax purposes, the White House says.
Would canceling student loan debt increase inflation?
Some prominent economists, such as former Treasury Secretary Lawrence Summers and Jason Furman, chairman of President Barack Obama’s Council of Economic Advisers, are strongly critical, saying the student debt write-off will fuel 40-year high inflation and may be unfair.
“Student loan relief is not free,” Furman tweeted on August 19. “It would be paid. Part of it would be paid by the 87% of Americans who don’t benefit but lose from inflation. Part of it will be paid for by future spending cuts and tax increases – with uncertainty over who will bear those costs.”
The Committee for a Responsible Federal Budget estimates that Biden’s plan “would undo more of the deflationary pressures than the Inflation Reduction Act and add 0.15 percentage points of additional inflation in the near term,” Bankrate analyst Sarah Foster noted.
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If you qualify for student debt forgiveness, what should you do with that money?
“Student loan forgiveness will likely lower your monthly payment or get rid of it altogether,” said Dan Casey of Bridgeriver Advisors in Bloomfield Hills, Mich. Take that freed-up money to pay off high-interest debt like credit cards, build an emergency fund, or invest it in your retirement. Although today looks brighter, the economy is still on shaky ground.
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If you don’t qualify for student loan cancellation, what should you do to prepare to start repayment in January?
“If you haven’t made a student loan payment since the break began, it’s important to understand how much you’ll owe each month,” said Daniel Milan, an advisor at Cornerstone Financial Services.
Then check your loan rates and start paying the highest rates first, sign up for autopay so you don’t miss a payment while you get back into the habit of paying regularly, and consider refinancing if it lowers your payments.
“Rolling multiple loans into one loan can also help you better keep track of how much you actually owe,” he said.
Medora Lee is a money, shopping and personal finance reporter at USA TODAY. She can be reached at email@example.com and subscribe to her free Daily Money newsletter for personal finance tips and business news every Monday through Friday morning.
This article originally appeared on USA TODAY: What is a pell grant? What you need to know about the Biden student loan debt plan.