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Inside Biden's Student Loan Forgiveness Plan - SmartAsset

The U.S. Department of Education has canceled almost $3 billion in student loans since President Joe Biden entered office in January 2021. The department forgave another $55.6 million in July for 1,800 borrowers who attended Westwood College, Marinello Schools of Beauty and the Court Reporting Institute. Secretary of Education Miguel Cardona says that this is part of an ongoing “commitment to standing up for students whose colleges took advantage of them.” Now, as almost one in eight Americans owe a record high of $1.73 trillion in college loans, many are hoping to get broader loan forgiveness to help manage or eliminate debt. Let’s break down what a Biden loan forgiveness plan could look like, and how it could benefit you. (Note: This is a developing story, and we will continue to update the article as more information becomes available.)

Consider working with a financial advisor to ensure that financing college or paying off college debt is handled in the best possible way.

Who Owes America’s Second-Largest Debt Category?

The $1.73 trillion student loan debt held by roughly 43 million borrowers is now the second-largest debt category in the U.S. after mortgage debt (worth $10.16 trillion in March 2021). And the average student loan debt is over $39,300 for each borrower in 2021.

The Federal Reserve’s Report on the Economic Well-Being of U.S. Households says that more than four in 10 adults who went to college took on some debt to pay for their education, and those who were under 30 were more likely to take out college loans than older adults.

If you break down student loan debt by age group, however, borrowers between 35- and 49-years-old hold the largest federal student loan debt in the second quarter of 2021, with $613 billion. Those aged between 25- and 34-years-old owe $500.6 billion, and those between 50- and 61-years-old have $273.7 billion outstanding.

Federal data from 2020 also shows that not all education debt comes from student loans. The Federal Reserve says that while 95% of those with outstanding debt hold loans, 21% borrowed with credit cards, 4% owed money on a home equity line of credit and 12% borrowed through other methods.

For comparison, 86% of adults with outstanding education debt for children or grandchildren borrowed money through student loans, 14% owed money on credit cards, 9% were paying debt from home equity loans and another 9% financed their family’s education needs in other ways.

Collectively, the Federal Reserve’s report shows that 26% of “borrowers had at least one form of education debt besides student loans.” And the median amount of education debt (including other methods outside of student loans) was between $20,000 and $24,999 in 2020, with 20% of adults behind on their payments.

What Biden Has Promised for Student Loan Forgiveness

Inside Biden's Student Loan Forgiveness Plan - SmartAsset

During his presidential campaign in 2020, Biden targeted his agenda for students as a “reliable pathway to the middle class.” The soon-to-be-elected president then described an education crisis where earning a degree and other credentials beyond high school has become unaffordable for many Americans.

For others, Biden said during his campaign, a college degree has also saddled young adults with so much debt that it prevents them from reaching important financial milestones like buying a home or saving for retirement. And in other cases, student loan debt could even burden multiple generations in a family, with parents and grandparents having to step up and shoulder a significant part of the education costs for their children and grandchildren.

On November 16, 2020, the president promised in a campaign speech to cancel $10,000 in student loan debt for each borrower. For reference, federal data from the Department of Education shows that if Congress approves this relief initiative, it would completely eliminate student loan debt for 14.8 million borrowers who in the second quarter of 2021 owe less than $10,000. The table below breaks down student loans by debt size and borrowers.

Student Loans by Debt FY 2021 Q2
Debt Amount Borrowers Total Owed
Less than $10,000 14.8 million $73.8 billion
$10,000 to $40,000 19 million $410.6 billion
$40,000 to $80,000 6.9 million $388.6 billion
$80,000 to $100,000 1.4 million $125.3 billion
$100,000 to $200,000 2.4 million $324.2 billion
Over $200,000 900,000 $271.3 billion
*Data for this table comes from the office of Federal Student Aid’s Portfolio Summary report.

Biden’s $10,000 relief initiative would completely cancel student debt for almost 33% of borrowers (14.8 million) in the table above. The Federal Student Aid’s Portfolio Summary says that the biggest group of borrowers owes between $20,000 and $40,000 (9.6 million), followed by those owing from $10,000 to $20,000 (9.4 million). Comparatively, 4.3 million owe between $40,000 and $60,000, and 4 million owe between $60,000 and $100,000.

The president also presented the groundwork for some of the educational proposals that would later influence the $1.8 trillion American Families Plan. These include initiatives that support tuition-free community college and training, halve undergraduate federal student loan payments, double awards for Pell Grants and expand student loan debt forgiveness.

Timeline of Important Changes Affecting Student Loans

While no legislation for student debt relief has been passed by Congress, Democrats and the Biden administration have taken some steps towards helping Americans manage or get out of student loan debt during the COVID pandemic. Here’s a breakdown of important student loan events in 2021:

  • January 20: On his first day as president, Biden extends student loan forbearance to September 30. This action pauses federal student loan payments and collection and maintains the interest rate at 0%. The White House says in a press release that Americans struggling to pay for basic necessities “should not be forced to choose between paying their student loans and putting food on the table.”
  • February 4: Senator Elizabeth Warren (D-Mass) and Senate Majority Leader Chuck Schumer (D-NY) reintroduce a bicameral resolution that calls on the president to use executive authority under the Higher Education Act of 1965 to cancel up to $50,000 for Federal student loan borrowers. White House press secretary Jen Psaki reaffirms Biden’s support to cancel “$10,000 of federal student loan debt per person” and calls on Congress to draft and pass a proposal that he could sign into law.
  • March 11:  Biden signs the American Rescue Plan, which aims to offset the impacts of the COVID-19 pandemic with $1.9 trillion in stimulus relief. The package includes more than $128 billion in grants to state educational agencies and $39 billion for higher learning institutions, and makes student loan debt forgiveness tax-free until December 31, 2025.
  • March 18: The Department of Education streamlines the borrower defense relief process, which cancels roughly $1 billion in student loan debt for 72,000 people. Those with approved fraud claims against colleges, universities and career schools will get federal student loan discharges and reimbursements.
  • March 29: More than 41,000 borrowers with total and permanent disabilities get $1.3 billion in student loans canceled. The Department of Education also waives income-monitoring requirements imposed by the Trump administration for another 190,000 borrowers with disabilities.   
  • April 28: Biden presents legislation for a $1.8 trillion American Families Plan, which includes funding for universal prekindergarten, free community college, and other education initiatives that aim to make college education affordable for low- and middle-income students.
  • June 16: The Department of Education approves another $500 million in student loan relief for 18,000 borrowers who attended ITT Technical Institute. This adds up to $1.5 billion in debt relief for approximately 90,000 people that qualified under less restringent borrower defense rules after the agency rolled back Trump limits in 2021.
  • June 23: Senate Majority Leader Chuck Schumer (D-NY), Senator Elizabeth Warren (D-MA) and other Democratic party legislators called on Biden “to extend the pause on federal student loan payments until at least March 31, 2022.”
  • July 9: The Department of Education cancels $55.6 million in student loan debt for 1,800 borrowers from Westwood College, Marinello Schools of Beauty and the Court Reporting Institute. Secretary of Education Cardona says in a press release that the government will continue to “review and approve borrower defense claims quickly and fairly so that borrowers receive the relief that they need and deserve.”

Inside Biden’s Student Loan Forgiveness Plan

Inside Biden's Student Loan Forgiveness Plan - SmartAsset

With Biden’s extension on student loan forbearance set to expire at the end of September, millions of borrowers are hopeful that the president could deliver timely debt relief. No student loan forgiveness legislation has officially been presented yet. But, based on the president’s campaign promises and other related education agenda, here are three initiatives that could be included in a possible student loan forgiveness plan:

Broaden student loan forgiveness: While progressive legislators are pushing for a student loan forgiveness plan that could cancel up to $50,000 for each borrower (this would wipe out immediately the entire debt for roughly 34 million people who in the second quarter of 2021 owe less than $50,000), Biden’s administration has reaffirmed its commitment to cancelling $10,000 for each federal student loan borrower. This initiative would cancel completely at least $73.8 million in loans, which is the combined amount owed by almost 15 million borrowers with less than $10,000 in debt in the second quarter of 2021.

Revise income-driven repayments: During his 2020 presidential campaign, Biden proposed to “halve payments on undergraduate federal student loans” so borrowers would pay 5% of discretionary income (this is your income after deducting taxes and essential expenses like food and housing) over $25,000 on loans. The president’s income-driven repayment plan would also forgive federal student loan debt after 20 years for borrowers who have made consistent payments. And individuals making under $25,000 annually would “not owe any payments on their undergraduate federal student loans and also won’t accrue any interest on those loans.”

Bring back borrower defense payment rules: The Department of Education overturned 2019 Trump administration rules that scaled back loan forgiveness opportunities for borrowers who had been defrauded by their colleges, universities and career schools. The department said in a press release on March 18 that this was the “first step in addressing borrower defense claims as well as the underlying regulations,” and it “will be pursuing additional actions, including re-regulation, in the future.” Current guidelines mandate that borrowers prove that their school acted fraudulently, which limits eligibility for student loan forgiveness.

For future students and the families of those intending to go to college, here are two additional initiatives included in the American Families Plan that could help minimize debt:

Increase Pell Grants: Biden said during his presidential campaign that he wanted to increase the maximum value of Pell Grants so that more middle-class Americans could participate. Later in April, he called for an $85 billion investment in the award as part of the American Families Plan to “help students seeking a certificate or a two- or four-year degree.” The president’s proposal adds $1,400 in additional Pell Grant assistance (the maximum award for the 2021-2022 school year is $6,495). The White House said that roughly seven million students depend on Pell Grants to help pay for college, but the value of these grants has fallen from covering nearly 80% of the cost of a four-year college degree to under 30%.

Free college tuition: While on the campaign, Biden also said that he wants to “make four-year public colleges and universities tuition-free for all students whose family incomes are below $125,000.” As part of the American Families Plan, the president has already called for $109 billion to “ensure that first-time students and workers wanting to reskill can enroll in a community college to earn a degree or credential for free.” Under this proposal, the federal government would team up with states, territories and Tribes to provide a free college education for roughly 5.5 million students. Biden is also asking Congress to fund a $39 billion program that offers two years of subsidized tuition for four-year HBCU, TCU or MSI students in families earning less than $125,000; and another $5 billion to expand existing institutional aid grants to those schools.

Bottom Line: What Does This Mean for You?

With almost one in eight Americans owing a record-high of $1.73 trillion in college loans, and the extension on student loan forbearance set to expire at the end of September, many are looking for government help to manage or eliminate their student loan debt.

Biden’s administration has already rolled back Trump administration rules to cancel roughly $3 billion in student loans, some from fraudulent colleges, universities and career schools. The president has also said that he supports broader forgiveness for federal student loan borrowers up to $10,000, which would eliminate at least $73.8 million in loans from almost 15 million people who owe less than that amount in 2021.

Other initiatives in Biden’s student loan plan could include revising income-driven payments and restoring borrower defense payment rules. Keep in mind that no student loan forgiveness legislation has been officially presented yet, and Congress needs to approve it before Biden can sign it into law.

We will continue to update this article as soon as more information becomes available.

Tips to Minimize (and Pay) Student Loan Debt

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Arturo Conde, CEPF® Arturo Conde is an editor at SmartAsset and a bilingual freelance journalist. He writes for NBC News and WhoWhatWhy. His articles have been published in Fusion, Univision, City Limits and the NACLA Report on the Americas.
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