[Update - June 3, 2023] The payment pause has an official end date. Read more about it here.
It was a big day in Washington for student loans. Earlier today, President Biden made two major announcements on student debt:
In April, Whitehouse Press Secretary, Jen Psaki, had signaled that either an additional extension or some amount of forgiveness would be announced by the end of August, but to many people’s surprise, the current administration revealed plans for both.
In a series of announcements this morning (including a Twitter post, press conference, and press release), President Biden outlined the broad strokes of his Student Loan Debt Plan which include both the anticipated $10,000 in forgiveness for individuals who earn less than $125,000 and the extension of the student loan pause through Dec 31, 2022. This means that for the ⅔ of borrowers who would still have loans even if $10,000 in forgiveness is applied, January will be the first time in almost three years that they would need to make a loan payment.
Biden also announced plans to forgive up to $20,000 in debt for Pell Grant recipients who meet the same income requirements, a 5% monthly cap on income-based repayments for undergraduate student loans, and proposed reforms to the existing Public Service Loan Forgiveness program.
So what will this announcement mean for people with student debt?
One part of the announcement, the extension of the pause on federal student loan payments, is fairly straightforward.
Biden made it clear that this would be the last time that the loan pause would be extended meaning federal student loans will begin accumulating interest again and will need to be repaid starting Jan 1, 2023.
For the ⅔ of borrowers who would still have loans even if $10,000 in forgiveness is applied, January will be the first time in almost three years they need to make a loan payment
As with the previous extensions, borrowers who hold federal student loans will NOT be required to make minimum payments on their federal loans until after Dec 31, 2022. Outstanding federal loans will also NOT accumulate any interest during this period.
If you read our previous post on the pause on federal student loan repayments, the benefits and caveats from the previous pause extension still hold true–for any borrowers who didn’t qualify to have any portion of their student debt forgiven, or who still have some amount of student loans outstanding after forgiveness, the pause remains a great opportunity to either save up for other financial milestones or pay down your loan principal before it begins to accumulate interest again on Jan 1, 2023.
The second part of the announcement signaled the Biden Administration’s intent to grant up to $20,000 in federal student loan forgiveness to qualifying borrowers. However, how this forgiveness will work (and if it will be enacted without any sort of political or legal challenge) remains to be seen. Further details are expected to be released in the coming weeks.
If the forgiveness plan does proceed as outlined, a majority of borrowers will still have some amount of outstanding debt, even after receiving some relief.
With $1.6T outstanding in federal student debt and the average amount of federal student debt per borrower now roughly at ~$35,790 as of Q2 2022, let’s dive into what the federal student loan forgiveness actually could mean for the student debt crisis.
*Source: numbers based on available data from the Federal Reserve and the Office of Federal Student Aid
Under the Biden Administration’s proposed student loan debt plan, borrowers who earn less than $125,000 (or $250,000 for married couples filing jointly) could qualify for $10,000 in federal student loan forgiveness; borrowers who took out Pell Grants for undergrad and meet the same income requirements, could receive up to $20,000 in student debt forgiveness.
The administration is also proposing a 5% monthly cap on income-based repayments for undergraduate student loans, and long-term changes to the existing Public Service Loan Forgiveness program.
$10,000 in loan forgiveness could eliminate debt for ⅓ of borrowers; but ⅔ of borrowers in the workforce will still have outstanding loans.
According to the latest data, roughly ~14.6M borrowers have $10,000 or less of student debt and 30.7M people hold more than $10,000. This means that, at most, $10,000 in loan forgiveness could eliminate debt for ⅓ of borrowers; but ⅔ of borrowers in the workforce will still have outstanding loans. Not everyone will meet the income threshold though–1 in 10 borrowers will likely not receive any benefit.
Senior Officials from the Biden administration estimate that some 43M borrowers will benefit from this forgiveness plan. If the plan were enacted today, nearly 8M borrowers would be likely to get their loans forgiven automatically, according to the Department of Education.
Under the latest announcement, Pell Grant recipients who meet the income requirements are eligible to receive up to $20,000 in student debt forgiveness. Currently, it’s estimated that 6 in 10 borrowers with some amount of federal student debt also received a Pell Grant. These borrowers also owe ~$4,500 more than on average than other borrowers, according to the Institute for College Access and Success.
Between the $10,000 in forgiveness for all qualifying borrowers and $20,000 in forgiveness for qualified Pell Grant recipients, senior administration officials estimate that up to 20M borrowers will have their debt completely canceled under the latest announced plan.
In general, Pell Grants are awarded to low-income students who display exceptional financial need and are only available for use towards undergraduate education. Each year, roughly ⅓ of undergraduate students receive a Pell Grant for their education.
Pell Grants are slightly different from student loans in that they are grants and usually don’t need to be repaid (except in some special circumstances including withdrawing early from a program).
It’s important to note that today’s announcement was just that: an announcement.
Many details of how the loan forgiveness plan will work still need to be released and it will likely take time for the administration’s plan to actually take effect. In the days to come, Biden’s forgiveness plan is almost certainly going to face political and legal challenges that may slow down the process even further.
Many details of how the loan forgiveness plan will work still need to be released and it will likely take time for the administration’s plan to actually take effect.
Federal student loan holders will get a better sense of the timeline for federal student loan forgiveness as the U.S. Department of Education releases more information around the details of the forgiveness plan, including how to apply for relief (that application should be available no later than Dec 31, 2022, when the payment pause ends) and the political response to this announcement unfolds.
[UPDATE]: On August 26, 2022, Secretary Cardona tweeted additional details on the timeline for loan forgiveness applications, announcing that applications would open in October and encouraging borrowers to apply for forgiveness by November 15 to receive relief before the end of the year.
As generous as this new policy is, it will not eliminate student debt entirely.
IF every person with federal student loan debt met the income requirements, this sweeping forgiveness would erase nearly $400B in federal student debt across the entirety of the federal student loan portfolio. However, we know that not everyone will meet this income threshold and some remaining 25.3M people will still have some amount of federal student debt remaining after forgiveness (assuming the administration’s estimates are correct).
It’s important to note that this forgiveness also doesn’t apply to any borrowers who hold private student loans, which account for roughly $131B (8%) of all outstanding student debt, or to federal student loans issued in the future.
Since 2007, the Federal student debt portfolio has increased an average of $78B each year. At this rate of growth, the amount of debt forgiven could be replaced by newly issued student loan debt in 4-5 years.
With the payment pause extended for a final time and the debt burden for many Americans now poised to be reduced, companies should consider adopting tax-free employer student loan contributions as a benefit. Companies now have a unique opportunity to help many of their employees pay off significant portions of their debt when payments resume starting Jan 1, 2023.
At Highway Benefits, we believe this benefit is one of the best ways to tackle the student debt crisis in the US. With this benefit, companies can help employees pay down the remainder of their outstanding loan balances (federal OR private), potentially saving them thousands of dollars in accrued interest and large amounts of financial stress.
Talk to our team today to learn more about how Highway can help you offer a student loan repayment benefit.
Disclaimer: This article is purely information and is not intended as financial advice. If you have federal student loans and want to know how these changes will affect your particular situation, visit StudentAid.gov or speak with a financial advisor. You can also sign up to receive updates on the loan forgiveness plan from the government at StudentAid.gov/debtrelief
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