More than 40 million Americans could have their student loan debt reduced — and in many cases eliminated — under the long-awaited forgiveness plan President Biden announced Wednesday — "a historic but politically divisive move in the run-up to the midterm elections," as The Associated Press puts it.
Biden is fulfilling a campaign pledge by erasing $10,000 in federal student loan debt for people with incomes below $125,000 a year, or households that earn less than $250,000.
And he’s canceling an additional $10,000 for people who received federal Pell Grants. About 60 percent of borrowers have gotten Pell grants, and the majority of them come from families making less than $30,000 a year. The Education Department estimates that 27 million people will qualify for up to $20,000 in relief.
Biden has been agonizing for months over how to address the student debt issue, under pressure from progressive Democrats who say debt forgiveness is necessary to address racial disparities in the economy, says The New York Times.
Republicans quickly denounced the plan as an insult to Americans who've repaid their debt and to those who didn’t attend college.
And some economists have raised concerns that debt relief will add to inflation by giving people more money to spend.
Because Biden is using executive action, rather than legislation, to forgive the loans, legal challenges are expected. But it's unclear who would have standing to make their case in court. A recent Virginia Law Review article argued that the answer might be nobody: States, for example, have little say in the operation of a federal loan system.
On its face, the plan could cost taxpayers about $300 billion or more in money they effectively lent out that never will be repaid. But the true cost is harder to calculate, and could be smaller, because much of the debt was unlikely ever to be repaid. More than eight million people had defaulted on their loans before the coronavirus pandemic. Many of those people had fairly small balances and now will be eligible for loan cancellation.
Biden also is extending a pause on federal student loan payments for what he says is the “final time.” The pause is now set to run through the end of the year, with repayments to restart in January.
And he’s seeking to let people with undergraduate loans cap their payments at 5 percent of their discretionary monthly income, down from the 10 percent ceiling now in place on most income-based payment plans.
He also wants to have the government cover the monthly interest for those making payments — even if their payment is zero, because their income is low — so balances won't balloon. Under the current system, interest still accrues, and many borrowers find themselves falling deeper into debt even though they're making their monthly payments.
The timing for the debt relief is uncertain; the Department of Education says it will set up an application process by the end of the year.
Many Democratic lawmakers and progressive groups have said addressing economic racial disparities would require forgiving $50,000 of debt, citing reports showing that African American and other nonwhite borrowers end up with higher average loan balances than their white peers.
Many economists say the move could have damaging consequences for students and taxpayers in the future, by encouraging colleges and universities to raise prices, with the federal government footing the bill.
Here is a fact sheet on the plan, from the White House.
And here is an FAQ, from the Times.