Editor’s note (Aug 24, 2022): We will continually update this page with the latest information as more information on Biden’s plan to cancel student loan debt comes out. To get the most up to date info, subscribe to our free weekly newsletter.
President Biden’s long awaited plan for student loan cancellation finally arrived, and it is far more generous than many initially anticipated.
The administration plans to cancel up to $10,000 of student debt for all households earning less than $125,000 individually or $250,000 as a married couple. Pell Grant recipients, which represent about 60% of all student loan borrowers, will receive up to $20,000 of cancellation.
A new income driven repayment plan will allow undergrads to pay 5% of their income, down from 10% currently. It will also provide faster forgiveness to borrowers with balances below $12,000, and negative interest accrual will essentially end.
President Biden also stated that there will be one final extension of the student loan pause until December 31, 2022.
Borrowers receiving cancellation will not need to worry about federal income taxes thanks to the American Recovery Plan (ARP) from March 2021, eliminating income taxes on forgiven or canceled federal and private student loans until December 31, 2025.
In this post, we’ll show you the key parts of the Biden student loan cancellation plan and explain what you’ll need to do to take action to receive the max in benefits by January 2023.
1. Broad student loan cancellation (& how to apply)
The Department of Education will use existing information from completed FAFSA forms and income driven repayment certifications to identify at least 8 million borrowers who qualify for automatic student loan cancellation.
Others will need to apply since the Deptartment of Education does not have access to income information for most borrowers.
In the coming weeks, the Department will assist servicers in releasing an application, which is free to submit. If you do not see cancellation automatically, you will need to apply for it.
We strongly encourage you to apply before December 31, 2022, as this cancellation power is predicated on the HEROES Act of 2003. This Act requires a national emergency declaration for major changes to student loans. In the absence of this declaration, this action would not have been able to occur.
Hence, if the Republicans were to retake control after the midterms in January 2023, you will want your student loan cancellation application to have been submitted long before then.
Note that only loans taken out before July 1, 2022, are eligible. The Department of Education will look at incomes in 2020 and 2021 to determine who qualifies, but we expect a lot of additional detail in the coming days and weeks.
2. A new Biden income driven repayment plan
The White House, Congress and many student loan advocates have called for simplification of the income driven repayment plans.
We have yet to see if this new IDR plan will accomplish this.
Under the Biden IBR plan, borrowers with undergraduate loans only will only have to pay 5% of their income for 20 years instead of 10%.
According to the initial press release, borrowers with both graduate and undergraduate debt would pay “a weighted average rate.”
It suggests the following:
- Borrowers with graduate student loans WILL be eligible for the new IDR plan.
- If you have 50% undergraduate debt and 50% graduate debt, your IDR payment percentage would be 7.5%. If you had 80% undergraduate debt, your IDR payment percentage would be 6%. If you have 90% graduate debt, your payment percentage would be 9.5%.
The federal poverty line for most IDR plans is currently 150%. This Biden IDR plan would allow borrowers to pay $0 on income up to 225% of the federal poverty line. This won’t be a game changer for higher-income borrowers, but it might result in lower payments and savings in the $100 to $200 a month range for many.
Extra relief for graduate borrowers in the Biden IDR plan
If Graduate school borrowers are included in Biden’s new IDR plan, they could see far more relief under this plan than undergraduate borrowers despite not seeing payment relief.
The reason? Interest will no longer accrue if your required IDR payment is less than the interest owed.
How would this work in practice?
Imagine a lawyer owes $200,000 from law school and must pay $500 a month under her IDR plan. She would not see her balance grow.
In contrast, if that borrower was a 4th-year Big Law associate and her IDR payment was $2,500 a month, her payment would fully cover her interest, so there would be no subsidy.
So essentially, this new plan would be the REPAYE plan on steroids (REPAYE subsidizes 50% of all unpaid interest).
And because undergraduate borrowers might owe $30,000 while a graduate school borrower might owe many multiples of that, the graduate school borrower will receive more in interest subsidies than the payment benefit the undergraduate borrower receives.
That said, if the grad school borrower is pursuing forgiveness, it doesn’t really matter as the remaining balance is forgiven anyway.
3. A “final” extension of the student loan pause
Remember the story “The Boy Who Cried Wolf”? President Biden said that January 31, 2022, would be the final extension of the student loan pause, only to go back on that after pressure from the Democratic Congressional delegation when the Build Back Better Act did not pass.
The President has stated in his August 24, 2022, announcement emphatically that this will be the final extension of the student loan pause.
While we hesitate to believe that due to the administration changing their mind historically, it’s far more likely that they will stick to this being the final extension of the zero interest, zero payments policy that has been in place since March 13, 2020.
If the Department of Education changed its mind about the repayment resumption a second time, it would not be able to convince borrowers that payments were beginning again. So we expect that payments and interest will actually begin starting January 1, 2023.
It’s likely that the first payment would actually not be deducted until around the end of January.
4. Expansion of Public Service Loan Forgiveness
This part of the Biden student loan plan is not exciting compared to the already existing PSLF Waiver.
Essentially, the administration will count many more types of payments than they had previously, such as late and partial payments.
Certain kinds of forbearance and deferment will also count.
The PSLF waiver is far broader than this, and it’s incredibly disappointing that only $10 billion has been canceled out of an estimated $140 billion+.
5. Holding schools accountable
The Department of Education will publish a watch list of schools with the worst debt outcomes in the country.
They will also require certain schools to adhere to institutional improvement plans.
Many of the highest debt programs are at graduate and professional schools. These students are knowledgeable enough to sign up for IDR plans and rarely default.
Thus, a school like NYU Dental can appear to be a great return for taxpayer dollars, which is likely not true when compared to lower-cost programs that educate students at a far lower cost.
While these accountability measures are a welcome improvement, our expectation is that they would be targeted at for-profit schools and not bring much scrutiny to non-profit universities, which are also big contributors to the student loan crisis.
The Department of Justice (DOJ) and the Department of Education both evaluated the authority of the President to cancel student debt, and both found that he could. DOJ produced a 25-page report.
The Department of Education further found that President Trump’s Education Department was incorrect in saying that the President could not cancel student debt.
Many lawyers on social media raise the point that no one has standing to challenge this decision.
Opponents of this decision will want to challenge it legally
I’m not an attorney. What I expect is that opponents of student loan cancellation will have a high incentive to challenge this decision because if the President could cancel hundreds of billions of student debt, then he could have also canceled all of it. That’s a precedent that a future President could take advantage of.
Addressing the question of standing, the Supreme Court has a 6-3 conservative majority that already looked down on executive actions such as the eviction moratorium, which was also due to the pandemic.
Of course, the Supreme Court is an appellate court, and there needs to be a lower court case first.
One case could be the borrower defense settlement, which argued that the Department of Education has wide discretion to cancel student debt. Affected schools could file a lawsuit blocking it and appeal to the Supreme Court.
Additionally, an opponent of student loan cancellation would only need to find a sympathetic judge who would not question a broader definition of standing to launch a challenge to this action to cancel student debt.
Could a lawsuit block student debt cancellation?
Yes and no. If a lawsuit eventually found that the President overstepped his authority, it’s hard to imagine a lot of already discharged debt being re-imposed by a court.
As with the PSLF waiver, once we see balances being forgiven, we expect the forgiveness would not be reversed.
Note that no one challenged the PSLF or IDR Waiver legally despite both having the potential to forgive hundreds of billions of dollars in debt.
However, that’s probably because the cost of those proposals was not immediately obvious at the time.
One part of the Biden student loan plan that is very safe is his new proposed IDR plan. A Court would be very unlikely to overturn or block any of the IDR plan changes the administration is making since they went through the normal negotiated rulemaking process.
How to get the most forgiven under Biden’s student loan relief plan
Most borrowers will need to apply for student loan cancellation.
Make sure your contact information is updated with your student loan servicer and agree to text message updates if possible. Check your email regularly and call your servicer if you receive an email to make sure the email is legitimate.
Biden’s New IDR plan will not be available until the summer of 2023 at the earliest. So borrowers simply need to stay put on their existing plans. We will come out with a lot of updates on this new plan, so if you’re not already, make sure to subscribe to our weekly update.
Borrowers who planned to pay off their loans and refinance before March 2020 would likely want to apply in early January 2023 once we verify that student loan interest has actually started again.
And finally, if you want expert help from one of our CFP®, CFA, and CSLP® student loan consultants, book an hour consult with the link below.
What do you think of Biden’s student loan plan? Let us know in the comments.