Biden Canceled Billions in Student Debt, But What He Plans to Do Next Could Have an Even Bigger Impact

Biden Canceled Billions in Student Debt, But What He Plans to Do Next Could Have an Even Bigger Impact

Biden Canceled Billions in Student Debt, But What He Plans to Do Next Could Have an Even Bigger Impact

With billions of dollars in student debt wiped off the books, millions woke up today to a different financial world. One where they have a higher net worth, greater purchasing power and better access to financial products such as mortgages.

President Joe Biden’s announcement of massive student loan forgiveness will transform the lives of 43 million borrowers — paying off the debt of 20 million in full.

“This will give people an opportunity to get on the financial ladder that wasn’t available to them yesterday,” says Mike Pierce, executive director of the Student Borrower Protection Center.

Pierce called the announcement historic.

“Cancelling debt and freeing people from those burdens will open up all these avenues for them to live fuller and more fulfilling financial lives,” he said.

But perhaps even more important is the Biden administration’s proposal to restructure the way the loans are repaid, giving future borrowers much more leeway when it comes to repaying debt.

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Forgiveness has been a long time coming

President Joe Biden announced Wednesday that the Department of Education will forgive up to $20,000 in student loans for those who qualify for Pell grants and $10,000 for all other borrowers who earn less than $125,000. Pell Grants are awarded to students deemed to have exceptional financial need.

Biden also extended the moratorium on payments one “final” time until Dec. 31, 2022, and proposed major changes that would make repayment more manageable.

The announcement has been a long time coming with the pandemic-era payment freeze set to expire on August 31. Biden, who pledged to cancel thousands of dollars in student debt for most borrowers during the election, had promised an answer before September.

Biden had already taken smaller steps toward clearing the debt. Last week, he announced the cancellation of student debt for those who attended ITT Tech, erasing $3.9 billion from the records. This, however, goes much further.

“By repealing this, that would certainly eliminate the burden for the 15 million people who owe less than $10,000 in student loan debt,” says Angelique Palomar, associate director of communications at The Institute for College Access and Success.

And even those who won’t see their student debt wiped out will see significantly reduced payments.

“It’s important to realize that this isn’t just transformational for people who don’t have debt,” says Pierce. “Many more people will get real, substantial, tangible, immediate financial relief when the student loan system is reinstated.”

Future plans

Another part of Wednesday’s announcement, which could potentially have an even bigger impact than the repeal, is how the Biden administration hopes to make paying off your loans more manageable in the future.

It is proposing an income-based repayment plan, which it says would “substantially reduce” monthly payments for people with lower and moderate incomes.

The proposed plan would require borrowers to pay no more than 5% of their “discretionary” income on undergraduate loans, up from the current standard of 10%.

It would also increase the amount that is considered non-discretionary income, so that if you earn below 225% of the federal poverty line, you will not have a monthly payment until your income exceeds that limit.

And if you owe less than $12,000, your balance will be forgiven after 10 years of payments instead of 20, among other suggestions.

Exactly how this will work, how much it will cost and who will benefit has not yet been made public.

“Obviously, we don’t have a lot of details, and I think those details are going to be very important,” says Persis Yu, policy director and CEO at the Student Borrower Protection Center.

Accumulating debt

Student loans are the second largest piece of household debt in the US, after mortgages. That totals $1.6 trillion for 45 million borrowers. About 92% of that is federal student loans.

And while the one-time cancellation and potentially smaller payments in the future are a relief, it may also lead some to think it’s likely to happen again.

“It doesn’t fix the overall problem, which is the dramatic increases in student loan borrowers,” says Phillip Braun, clinical professor of economics at Northwestern University’s Kellogg School of Management.

Braun adds that student debt held by the government has increased more than 600% since the Great Recession.

“So this cannot go on. The US government needs to find a way to not have this higher student loan burden affecting their budgets over time.”

Forgiving $10,000 per borrower making less than $125,000 would cost taxpayers $300 billion this year, according to the Penn Wharton budget model. However, the model has not been updated since it was announced that many people would forgive up to $20,000.

Braun says the forgiveness could encourage people to take on more debt or give institutions a reason to raise the cost of schooling.

“The government needs to make it harder for people to borrow and get student loans… Something has to be done,” Braun says. “And my recommendation makes it harder for student borrowers to get money. And this is the opposite of that.”

Planning your next steps

So, where do you go from here? Information about the plan is still coming out, but Palomar at the Institute for College Access and Success has some advice.

You’ll want to keep an open line of communication with your loan servicer, he says.

“It’s a good idea for all borrowers to check the status of their student loans as soon as possible,” says Palomar.

Confirm which payment plan you’re on and make sure your details are updated as required. You can do this by going to studentaid.gov. There, you can make changes to your account, keep your information up to date, and customize your plan and payment schedule.

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This article provides information only and should not be construed as advice. Provided without warranty of any kind.

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