Approximately 45 million Americans carry federally held student loan debt. The New York Federal Reserve reported that the total outstanding balance at the end of 2021 for federal student loans, including defaulted loans, was $1.38 trillion. It is the largest form of consumer debt outside of mortgages. During his presidential campaign, Biden promised to offer student debt relief, and since the start of the pandemic, borrowers have been benefiting from a debt relief program that has continued to extend.
The CARES Act.
The Coronavirus Aid, Relief, and Economic Security Act (CARES Act) was passed by Congress on March 27, 2020. Included in the bill’s $2.2 trillion economic relief package was the automatic suspension of principal and interest payments on federal student loans. This loan forbearance with a fixed 0% interest rate was initially supposed to last through September 30, 2020. However, it was subsequently extended through December 2020, then January 2021, then September 2021, then May 2022, then August 2022, and again it has been extended through December 31, 2022. Considering the upcoming midterm elections, this did not come as a surprise to many. However, borrowers have been warned that they should start preparing for their repayment plans to resume in January 2023.
But the relief doesn’t stop there!
On August 24, 2022, Biden announced from the White House details of the new Student Loan Forgiveness Plan. In addition to every student loan borrower receiving a final forbearance extension through December 31, 2022, individual borrowers with an income of $125K or less (or $250K or less per couple) will be eligible to receive student loan forgiveness of up to $10K. Furthermore, those same eligible borrowers who have also received a Pell Grant will be granted forgiveness of up to $20K.
The White House says that the debt relief will not be counted as taxable income for federal income tax purposes. Applications should become available in mid-October on the studentaid.gov website, which may take 4-6 weeks to process once submitted. Borrowers will have until December 31, 2023 to apply. To be notified via email when the process has officially opened, go to ed.gov/subscriptions and subscribe to the Federal Student Loan Borrower Updates.
Among other changes, current and future borrowers can also expect to see a more affordable Income-Driven Repayment Plan. Some highlights of the plan include capping the monthly payments at 5% of the borrower’s discretionary income, currently down from 10-15%, as well as forgiving loan balances after 10 years of payments instead of 20 years (for borrowers with original loan balances of $12K or less).
Student Loan Relief is NOT Free.
Is there really such a thing as free debt relief, or are we just shifting from one type of borrowing to another? By September 2022, more than $145 billion in interest will have been waived on federal student loans due to the payment pause and interest waiver since March 2020. That does not include the actual principal amount of each student loan. In addition to that cost, Biden’s recent promise to cancel $10K-20K in eligible student loan debt is estimated to cost the government over $300 billion, which is the lowest estimate among analysts’ projections. It’s safe to say that billions of dollars in student loan debt do not just magically disappear. Covid-19 relief spending in the fiscal year 2021, such as stimulus checks and emergency rental assistance, contributed to a $2.8 trillion deficit. Canceling this student loan debt will increase the federal deficit even more, and the higher the deficit, the less likely our country can pay back its debt. The two most common ways to reduce the deficit are to decrease spending or increase taxes, which would ultimately put the cost on the shoulders of the general public.
The Student Debt Crisis Continues.
Does student debt forgiveness encourage more reckless borrowing? There are many contributing factors to this student debt crisis, such as the rising cost of tuition, as well as the student loan industry’s trend of handing out loans regardless of the borrower’s ability to pay it back. While many are fighting for an increase in accountability and the prevention of unchecked borrowing, many student loan borrowers have banded together and are committed to fighting until all student debt has been canceled. Biden's plan lacks long-term solutions to address the issues that have long plagued the federal student loan system. Debt cancelation may bring immediate relief to borrowers today, but the Committee for a Responsible Federal Budget projects that within 5 years the overall amount of federal student loan debt will return to $1.6 trillion.