President Biden plans to cancel $10,000 to $20,000 of student debt for millions of borrowers and create a new IDR plan to lower payments for millions more. The debt cancellation plan has drawn numerous legal challenges from Republican and conservative groups, while the IDR plan remains uncontested.
We’ll go into detail on what President Biden has proposed as well as discuss the likelihood that his plans will come to fruition.
The Key Parts of the Biden Student Loan Plan 1. Broad student loan cancellation (& how to apply) 2. A new Biden IDR Plan (income driven repayment) 3. A Third “final” extension of the student loan pause 4. Expansion of IDR Forgiveness and Public Service Loan Forgiveness 5. Holding schools accountable Legal authority of student loan cancellation Opponents of the Biden Student Loan Plan Challenge It Legally Could a lawsuit block student debt cancellation or the New IDR Plan? How to get the most forgiven under Biden’s student loan relief plan
The Key Parts of the Biden Student Loan Plan
Biden’s plan for student loans can be broken down into five parts:
- Cancellation of $10,000 to $20,000 (this plan is on hold by the courts)
- A new income driven repayment plan that will lower payments for most borrowers
- A pause on payments and interest that will last until the Supreme Court rules on cancellation
- A PSLF Waiver and IDR Waiver that will grant far more credit to borrowers seeking forgiveness of their student loans
- Increased scrutiny on schools’ costs, particularly for profit schools
It’s clear that President Biden’s plan for student loans is more aggressive and bolder than most anyone anticipated. We’ll go into greater detail on each plank of the Biden student loan plan below.
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1. Broad student loan cancellation (& how to apply)
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.
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.
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.
The Department has assisted servicers in releasing an application, which is free to submit. If you do not see cancellation automatically, you will need to apply for it.
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.
Over 16 million people have already been “approved” for cancellation once the Department is allowed to process discharges. Currently, we are waiting on the legal process to play out as lower courts have blocked Biden’s student debt relief plan and cancellation will ultimately be decided on by the Supreme Court.
Currently, the administration is not accepting new applications until the legal process has played out more fully.
2. A new Biden IDR Plan (income driven repayment)
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.
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, but it’s extremely aggressive in its generosity to borrowers.
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
Graduate school borrowers could see far more relief under this Biden IDR plan than undergraduate borrowers despite not seeing as much 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, the interest subsidy doesn’t really matter as the remaining balance is forgiven anyway.
3. A Third “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 stated in his August 24, 2022 announcement emphatically that the student loan pause would finally end December 31, 2022. Then he backtracked again.
So we are on the 3rd “final” extension of the student loan pause. It ends “60 days after June 30, or earlier if the legal challenges to Biden’s debt relief are resolved earlier than that.”
What’s clear is that President Biden is willing to extend the pause without regard for prior statements on a pause being “final.” Borrowers are right to winder if the pause ending “at the latest on August 2023” is indeed the “final” pause. It could last into 2024, or a court could strike it down unexpectedly, or anything in between.
4. Expansion of IDR Forgiveness and Public Service Loan Forgiveness
The IDR Waiver and PSLF Waiver are game changing for borrowers who have been in repayment for many years. While the PSLF Waiver has technically expired, it’s functionally available through the the IDR waiver until May 1, 2023.
Under these two programs, the administration will count most types of payments, forbearances, and deferments towards the 10, 20, and 25 year repayment periods needed to receive total forgiveness under PSLF and IDR respectively.
The PSLF Waiver and IDR Waiver combined could result in hundreds of billions of cancelled loans.
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
This plan is the least aggressive in the Biden plan for student loans. 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.
This does little to fix the student loan problem. Most schools with bad outcomes are for profit, but most schools with the largest debt to income ratios are actually graduate and professional schools with good employment outcomes.
A Barber Institute that charges $10,000 but can’t place students into jobs can be a bad return on taxpayer dollars just as a dental school in New York can be that charges $600,000 for a degree where students earn $120,000 after graduation. Yet the administration is seemingly doing little to fix these problems.
While these accountability measures are a welcome improvement, our expectation is that they would be targeted at for-profit schools that are mostly on the way to shutting down anyway, without much scrutiny brought to non-profit universities, which are also big contributors to the student loan crisis.
Legal authority of student loan cancellation
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 the Biden Student Loan Plan Challenge It Legally
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.
The Supreme Court has a 6-3 conservative majority that already blocked executive actions such as the eviction moratorium, which was also due to the pandemic.
White the administration asserts that no one has standing to block their student debt plan, lower courts have already found Biden’s student loan plan illegal. An appellate court issued an injunction.
Ultimately, the Supreme Court will be the body that decides if Biden’s student loan plan survives.
Could a lawsuit block student debt cancellation or the New IDR Plan?
We have already seen actual relief be blocked by lower courts. Ultimately, the entire plan could be thrown out by the Supreme Court. We will find out in 2023.
One part of the Biden student loan plan that is much safer is his new proposed IDR plan. A Court would be unlikely to overturn or block any of the IDR plan changes the administration is making since they went through the normal negotiated rulemaking process.
However, if the administration makes the IDR plan even more generous in the event the Supreme Court blocks its debt relief plan, the President’s political opponents could seek to challenge the new IDR plan in court arguing it’s not really a repayment plan.
How to get the most forgiven under Biden’s student loan relief plan
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. 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 mid to late 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 to take advantage of the limited time IDR Waiver, book an hour consult with the link below. For professionals with six figures of student debt, we could very likely find savings many multiples of our consult fee.
What do you think of Biden’s student loan plan? Let us know in the comments.
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