Features of Student Loan Debt Relief Announced by President Joe Biden

Details, analysis and legal hurdles ahead

• Summary: Out of the around 45 million Americans with federal student loan debt, the plan announced Wednesday by President Joe Biden gives $10,000 in relief for all borrowers with an annual income (in either the 2020 or 2021 tax year) below $125,000 ($250,000 for couples) and $20,000 in relief for those who qualified for federal Pell grants earmarked for low-income undergraduates below the income cap. Over 60% is the proportion of borrowers who received Pell grants and are eligible for $20,000 in relief, according to the White House. The Education Department said it will release additional details on how borrowers can claim relief in the weeks ahead. The proposed regulations will be published in the Federal Register and the public will be able to comment on the draft for 30 days.
• Varied response to announcement. President Biden has acknowledged the polarized response. “I understand that not everything I’m announcing today is going to make everybody happy,” he said yesterday. “But I believe my plan is responsible and fair.”
• Timing: The announcement did not specify when the debt forgiveness would take effect but suggested that it would be by the end of the year. The Education Department can’t grant forgiveness automatically to every eligible borrower. Instead, borrowers whose income data isn’t already filed with the department will have to apply and demonstrate that they meet the limit. According to the Biden administration, “nearly 8 million borrowers may be eligible to receive relief automatically because relevant income data is already available to the U.S. Department of Education.” The White House said borrowers who took out federal loans by June 30 of this year are eligible for forgiveness. Loans taken out after that date will not be eligible.
• Tax impact: While debt forgiveness is often treated as income for tax purposes, the canceled student debt will be exempt, like some other federal student debt forgiveness programs. Senate Majority Leader Chuck Schumer helped get the 2021 American Rescue Plan to include a provision that would make all types of student loan forgiveness tax-free through December 2025, to make sure that any future debt cancellation would not be treated as taxable income. However, the discharged debt is likely subject to state income tax in several states.
• 32% of all borrowers: The initiative could instantly wipe out all outstanding federal student loans for up to 14.6 million borrowers who held less than $10,000 in debt as of the end of June, accounting for 32% of all borrowers, according to federal data, provided those individuals fall below the income cap.
• Impact: The policy will also erase at least half of the student loan debt held by the 20.5% of borrowers who owe between $10,000 and $20,000 and will take a significant chunk out of the $20,000 to $40,000 owed by another 21.4% of borrowers.
• But… The relief does not mean much for the most indebted Americans: Some 38% of the $1.62 trillion in total outstanding federal student loan debt is held by borrowers with balances of more than $100,000, even though they account for just 7.5% of all borrowers.
• The action doesn’t affect student loans issued by private lenders, just the ones directly from the federal government. But private loans make up less than 10% of total student loan debt in the U.S.
• For borrowers enrolled in standard plans who owe more than will be forgiven, the new relief offers a choice: Continue making the same monthly payments but pay off their loans sooner or reduce monthly payments but stick with the 10-year payoff period.
• The cost of an education has been steadily rising. Average tuition and fees for full-time undergraduate students at private universities stood at $37,600 for the 2021-22 academic year, about 19% higher than they were a decade earlier, according to data from the Department of Education. That does not include room and board. For public universities, average tuition and fees were $9,400 in 2020–21, about 10% higher.     
• Analysis: Despite the income cap, research shows the White House plan still slightly favors higher-income Americans. Analysis of a $10,000 blanket relief program published Tuesday by the Penn Wharton Budget Model found 69.79% of overall debt forgiveness would go to the top 60% of Americans by income, while individuals who make between $82,400 and $141,096 — placing them between the 60th and 80th percentile — would receive the greatest share of overall forgiveness, at 28.1%, though the additional relief for Pell grant recipients should bring further benefit to lower-income borrowers. According to the administration, 87% of the benefits would go to borrowers earning $75,000 a year or less.
• Of note: Higher-earning Americans hold more student loan debt, with the top 10% of individuals holding 17.4% of all debt compared to 13.8% for the bottom 20% of earners, according to the most recent installment of the Federal Reserve’s Survey of Consumer Finances in 2019.
• Cost: A blanket $10,000 forgiveness plan would have cost the federal government $311 billion in 2022, according to Penn Wharton Budget Model estimates, but the income limit would only save the government a relatively small $12.6 billion. Research shows the income cap helps make the policy less regressive and benefits poorer Americans more. That doesn’t include the estimated $20 billion it will cost to extend the moratorium on loan payments through the end of the year — a delay that benefits rich and poor borrowers alike. The moratorium so far is estimated to have cost some $115 billion.
• Inflation impact: The action will add to the federal deficit over time since borrowers will repay less, or none, of their loans to the federal government, but it doesn’t involve the immediate outlay of federal funds. Economists say that a tailored debt cancellation plan is unlikely to exacerbate short-term inflationary pressures, but could add to them in the long term, especially if universities continue to raise tuition because students might expect their loans to eventually be canceled. Jason Furman, a former Obama economic adviser who has opposed the move, wrote on Twitter: “Pouring roughly half trillion dollars of gasoline on the inflationary fire that is already burning is reckless.” Others argue that the move doesn’t address the underlying problem of soaring higher-education costs, with some worried that universities may raise tuition and students may borrow more if they believe debt could be canceled again.
• Capping repayment levels. How will income-driven plans change? The administration is proposing a rule that would slash the cost of loan repayment for borrowers in the income-driven repayment program. This proposal would:
• Cap monthly payments at 5% of discretionary income instead of the current 10%. Reduce the amount of income considered “discretionary,” lowering the monthly payment amounts.
• Forgive loans after 10 years of repayments for borrowers who owe $12,000 or less.
• Prevent loan balances from growing by having the federal government cover the difference between the borrower’s monthly payment and the amount of interest owed.
• Under the proposed regulation, enrolled borrowers making less than 225% of the federal poverty line wouldn’t have to make monthly payments on their loans.
• Extending the repayment pause. The pandemic-era halt to student loan repayments was again extended — but the administration is warning that this is the last time. At the start of the new year, repayments will resume.
• The Education Department is also proposing long-term changes to the Public Service Loan Forgiveness program, which provides loan forgiveness to borrowers who take public service jobs. In addition, the department will publish an annual list of degree programs with the worst debt levels in the country and ask colleges turning out graduates with high debt loads to develop plans to bring down debt levels.
• Court challenges likely. The policy is expected to face challenges in court. The administration is basing its legal authority for cancellation in part on the Covid-19 national emergency, citing financial harms suffered by borrowers. It also rescinded a Trump administration memo that concluded that legal authority doesn’t exist for mass cancellation. Biden’s plan will test the legal limits of the federal government’s authority to cancel student debt. Its success could depend on how courts would interpret the education secretary’s powers under the 1965 Higher Education Act, which allows the secretary to “consent to modification” of loans, and “compromise, waive, or release” unspecified amounts of student debt. President Biden has previously raised questions about whether he has the power to take executive action to cancel student debt on a large scale. “I don’t think I have the authority to do it by signing with a pen,” Biden said during a CNN town hall last year.