With billions of dollars in student debt written off the books, millions woke up today to a different financial world. One where they have higher net worth, more purchasing power and better access to financial products like mortgages.
President Joe Biden’s announcement of mass student loan forgiveness will transform the lives of 43 million borrowers – paying off the debt of 20 million in full.
“This will offer people an opportunity to move up the economic ladder that was not 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 complete economic lives,” he said.
But perhaps even more significant is the Biden administration’s proposal to restructure the way loans are repaid, giving would-be borrowers much more leeway when it comes to paying down debt.
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Forgiveness has been a long time
President Joe Biden announced Wednesday that the Department of Education will forgive up to $20,000 in student loans for those who have qualified for Pell Grants and $10,000 for all other borrowers who earn less than $125,000. Pell Grants are awarded to students who are considered to be in exceptional financial need.
Biden also extended the moratorium on payments once “final” until December 31, 2022, and proposed significant changes that will make the payment more manageable.
The announcement took a long time to get to the pandemic-era pay freeze, which would end on August 31. Biden, who promised to cancel thousands of dollars in student debt to most borrowers during the election, promised a response before September.
Biden had already taken smaller steps to settle debts. Last week, he announced the cancellation of student debt for those who attended ITT Tech, wiping $3.9 billion from the records. This, however, goes much further.
“Cancelling this will certainly clear the slate for the 15 million people who owe less than $10,000 in student loan debt,” says Angelique Palomar, associate director of communications for The Institute for College Access and Success.
And even those who won’t see their student debt eliminated will see payments significantly reduced.
“It’s important to realize that this isn’t just transformative for people who don’t have debt,” says Pierce. “Many more people will get real, significant, tangible and immediate financial relief when the student loan system gets back up and running.”
Another part of Wednesday’s announcement, which could have an even bigger impact than the cancellation, is how the Biden administration hopes to make repayment on its loans more manageable in the future.
He is proposing an income-based payment plan, which he says will “substantially reduce” monthly payments for low- and middle-income people.
The proposed plan would require borrowers to pay a maximum of 5% of their “discretionary” income in undergraduate loans, as opposed to the current standard of 10%.
It would also increase the amount that is considered non-discretionary income, so if you earn less than 225% of the federal poverty line, you won’t have a monthly payment until your income increases that threshold.
And if you owe less than $12,000, your balance would be forgiven after 10 years of payment instead of 20, among other proposals.
How exactly this will work, how much it will cost and who will benefit has yet to be disclosed.
“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 management consultant at the Student Borrower Protection Center.
debt piling up
Student loans represent the second largest share of US household debt, after mortgages. It totals $1.6 trillion for 45 million borrowers. About 92% of this is federal student loans.
And while the one-time cancellation and potentially smaller payments down the road are a relief, they can also make some people think it’s likely to happen again.
“That doesn’t solve the general problem, which is the dramatic increase in the number of student loan borrowers,” says Phillip Braun, clinical professor of finance at North Western University’s Kellogg School of Management.
Braun adds that government-owned student debt has risen more than 600% since the Great Recession.
“So this can’t go on. The US government needs to figure out a way to not have this greater burden of student loans affect their budgets over time.”
Forgiving $10,000 per borrower who earns 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 the announcement that many people would have up to $20,000 forgiven.
Braun says forgiveness can encourage people to take on more debt, or give institutions a reason to raise the cost of education.
“Actually, the government has to make it harder for people to borrow and get student loans… Something has to be done,” says Braun. “And my recommendation is making 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 leaking, but Palomar of The Institute for College Access and Success has some tips.
You’ll want to keep an open line of communication with your loan agent, she says.
“It’s a good idea for all borrowers, as soon as they can, to check the status of their student loans,” says Palomar.
Confirm which payment plan you are on and make sure your information is updated as needed. You can do this by going to studentaid.gov. There, you can make changes to your account, keep your information up to date, and adjust your schedule and payment plan.
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This article provides information only and should not be construed as advice. It is provided without warranty of any kind.