Biden’s Student Loan Forgiveness Plan

            On Wednesday, President Biden announced a plan that would grant student loan forgiveness for those whose incomes are below $125,000 a year, or households that earn less than $250,000 a year. Those who qualify will receive $10,000 in loan forgiveness if they did not receive a Pell Grant and $20,000 if they did.

            In the announcement, the White House ensured that “no high-income individual or high-income household - in the top 5% of incomes - will benefit from this action.”

            The plan applies to federal loans taken out to attend undergraduate and graduate school, along with people who have Parent Plus loans. Those who received Pell Grants make up 60% of all student loan borrowers, meaning that 27 million people will be eligible to receive up to $20,000 in relief. About 90% of relief will be going to those who earn less than $75,000 a year.

            The loan forgiveness only applies to the amount of your outstanding debt. If a person qualifies for the $10,000 in relief but only owes $7,000, they will only receive $7,000 in relief. In addition, because congress eliminated taxes on loan forgiveness through 2025, people will not have to pay federal taxes on this relief. It is possible that states can tax cancel debt but not certain that it will happen.

            Most individuals and families will have to apply for the relief and prove their income. Applications should be available before the year ends. About 8 million borrowers will see the forgiveness automatically because the U.S. Department of Education has the relevant income data.

            Over the course of the past 40 years, the total cost of public and private four-year education has almost tripled. The amount of Pell Grants distributed has not kept up with this price increase. Almost a third of those who have student loans do not have a degree.

            The Biden-Harris administration is proposing a rule that would reduce future monthly payments significantly for lower-income and middle-income borrowers. The plan would cut the amount in half that borrowers have to pay each month from 10% to 5% of discretionary income, discretionary being money left over after taxes and spending on necessities such as bills, food, etc. In addition, the amount of money that is considered non-discretionary income will be raised, so it is protected from repayment, protecting low-income individuals. The plan will forgive loan balances after 10 years of payments for those with loan balances of less than $12,000.

            Critics of Biden’s plan worry that loan forgiveness will lead to increased inflation. While people will have less of a debt burden, this means more people have money to spend on things like homes and cars, increasing demand. Others worry that this is just a band-aid on a much bigger problem. College tuition prices have been rising faster than inflation. Forgiving debt might encourage students to take out bigger loans in the future, making colleges likely to raise tuition costs.

            Biden said this plan’s “targeted actions are for families that need it most: working and middle-class people hit especially hard during the pandemic making under $125,000 a year.” While canceling debt may have a big impact overall on inflation, for the individual, this will increase the quality of life. The money that people were spending on their loans can now go to other necessities, relieving the worry of making ends meet.