What student loan forgiveness means for you

President Joe Biden announced his administration’s long-awaited student loan forgiveness plan Wednesday, saying it will forgive $10,000 in student loans for borrowers who earned less than $125,000 during the pandemic. People who received Pell Grants, grants to low-income students, while they were enrolled in college will be eligible to have $20,000 in debt forgiven.

The move will be enough to wipe out some student debt entirely: 15 million of the 43 million people with federal loans owe less than $10,000, and those borrowers are typically the most likely to fail to pay their loans back. In all, the plan will eliminate student debt for about 20 million people, according to an analysis provided by the Education Department, and decrease monthly payments by an average of $250 for borrowers with a remaining balance who are on standard 10-year payment plans.

The Committee for a Responsible Federal Budget, an anti-deficit group, came up with a price tag of $230 billion for a less-generous version of the program that did not include the additional aid for Pell Grant recipients.

Biden’s announcement came about after months of speculation and a pause on student loan payments that lasted more than two years. Ultimately, the plan showcases the attraction, and the limitation, of executive action. Biden had the opportunity to provide immediate financial relief to millions in need, and he took it. But the challenge of preventing people from falling into the student debt trap in the future remains.

Here’s what we know about the policy and how it would work.

I have student loans. What does the announcement mean for me?

If you have a federal “Direct Loan” — the most common type of student loan — issued before June 30, 2022, you will be able to apply to have your outstanding balance reduced. All direct loans are eligible, including loans to parents and graduate students.

If you qualify and your balance is less than $10,000, the loan will be retired; if you received a Pell Grant while enrolled in college, the amount that can be forgiven goes up to $20,000.

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Only people who earned less than $125,000 as an individual or $250,000 as part of a married couple in 2020 or 2021 will be eligible for forgiveness.

The Education Department said in a press release Wednesday that 8 million borrowers may be able to qualify automatically because the Education Department already has information about their income. That still means the majority of people will have to apply. The application is not yet available, but the department said it will be made public before the end of the year.

If you aren’t eligible for forgiveness, or if it pays off only part of your loan balance, loan payments will resume in January 2023.

About 10 million people, about a quarter of student loan borrowers, have federal student loans that are not “Direct Loans.” Most of these borrowers took out loans before 2010 through a now-defunct program in which private banks made student loans that were guaranteed and subsidized by the federal government. Others borrowed directly from their college through the federally financed also-defunct Perkins Loan program. The Education Department says that non-Direct Loans and Perkins Loans currently held by the federal government will be eligible for forgiveness, while solutions are currently being explored for the minority of non-Direct Loans that are held by private entities.

If you took out a student loan from a private bank or lender and the federal government wasn’t involved, you still owe that money.

That all sounds really complicated, with the $10,000 cap and the income limits and the application and so on. Why not just forgive all the loans?

The Biden administration chose this policy for a combination of political, policy, and legal reasons.

Student loan forgiveness was a hot topic during the 2020 Democratic presidential primary. Elizabeth Warren promised to forgive the first $50,000 of student loans as soon as she took office. Bernie Sanders vowed to cancel all the debt. Joe Biden took what was, in the context of the debt forgiveness debate, a more moderate position, pledging to support Congressional action to forgive $10,000 in debt. The voters chose Biden.

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The president, who attended the University of Delaware as an undergraduate, has said that he doesn’t want to subsidize well-off people who borrowed money for Ivy League degrees. The White House is likely wary of potential news stories about law firm partners getting what amounts to a five-figure check to write off their law school debt at the same time that less wealthy families are struggling to afford gasoline and food.

The $10,000 limit also reflects a peculiarity in the relationship between the size of student loans and the likelihood of students paying them back. A study from the New York Fed found that students are most likely to default on the smallest loan balances and least likely to default on the largest. That’s because, if you’re a student, the only way to get a large student loan from the federal government is to go to graduate or professional school.

While undergraduate loans are capped at $31,000 for most students, graduate loans have no hard cap and can range into the hundreds of thousands of dollars. People with graduate loans are, by definition, already college graduates, and thus on average will earn more money than people without degrees. Many graduate and professional degrees boost earnings even higher.

Many people with small loan balances, by contrast, are college dropouts. They didn’t borrow much, but they have no credentials to help them earn better wages. Or they borrowed for a certificate that takes less than a year to earn and doesn’t have much value in the labor market. Many victims of exploitative for-profit colleges fall into this category. So do students who had few assets and little income before starting college.

Of the 43 million people with federal loans, 15 million owe less than $10,000. Another 9 million owe between $10,000 and $20,000. By eliminating a minority of outstanding debt, Biden would forgive most or all balances for the majority of student debtors, disproportionately those who are at the highest risk of default.

Is this even legal? Is there anything Biden’s political opponents can do to stop him?

Maybe? And, maybe? The Higher Education Act is almost 60 years old, and no president has ever done anything like this before. The Trump administration’s 2020 decision to suspend all federal student loan payments, which Biden has extended multiple times, came from a separate law granting the president powers during a national emergency like a pandemic. Biden is citing that authority for the new loan forgiveness plan.

There are a host of constitutional provisions, federal laws, and legal precedents that obligate federal agencies to collect on outstanding debts. Skeptics also point out that Congress has enacted a number of specific student loan forgiveness programs, including plans that eliminate remaining debt after 20 years of payments or 10 years of public service. The administration’s recent decision to wipe out debt for students who attended the notorious for-profit Corinthian Colleges was based on a discrete legal provision meant to protect students who were defrauded by their college.

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If Congress has specifically decided when loans can be forgiven, the thinking goes, it has also, by implication, decided that loans can’t be forgiven under other circumstances. Shortly before leaving office, Trump administration lawyers issued a memorandum asserting that the Department of Education does not have the authority to unilaterally forgive all the loans. But the Biden administration is not legally bound by that memo, and other legal scholars have argued that the Department of Education has the power to unilaterally forgive loans.

Opponents of debt forgiveness will also have to get over a considerable legal hurdle called “standing,” which means that not just anyone can file a lawsuit claiming that an executive order is illegal. You have to demonstrate that you would be personally harmed by the action. Merely being a taxpayer who implicitly owes a percentage of the national debt doesn’t count.

Because the benefits of debt forgiveness are specific and possible harms, such as the risk that loan forgiveness would worsen inflation, are generalized, few people or organizations can plausibly claim standing. Those that might include the organizations that the Department of Education hires to service loans, since they get paid per borrower and forgiveness will reduce the number of borrowers to service. The “guarantee agencies” that hold many of the old non-Direct loans that would be refinanced are also candidates.

That said, federal judges have been known to take an expansive view of standing if they really don’t like the action being challenged. In June, the Supreme Court’s West Virginia v. EPA decision placed new limits on the ability of federal agencies to expansively interpret their authority in matters of “vast economic and political significance.” The ultimate fate of executive loan forgiveness in the federal courts remains a big unknown.

Let’s say the courts allow loan forgiveness to happen. Is it a good idea?

Many Republicans have publicly opposed loan forgiveness, particularly in recent months, as the movement for executive action has gained steam. In May, Mitch McConnell said, “Student loan socialism would be a giant slap in the face to every family who sacrificed to save for college, to every graduate who paid their debt, to every worker who made a different career choice so they could stay debt-free.”

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There are also arguments among the left about the progressiveness of debt forgiveness. Seventeen percent of Americans 18 and older have federal student loans. Most of them have college degrees. College graduates are, as a group, unambiguously better off than non-graduates. They earn more, own more, and are less likely to become unemployed. They live longer, healthier lives.

The Committee for a Responsible Federal Budget estimated that an earlier version of the Biden plan, one that did not include the additional debt relief for Pell Grant recipients, would eliminate roughly $380 billion in student debt, with a net cost to the taxpayer of about $250 billion, given that some of the debt would have been wiped clean under existing forgiveness plans. There are ways to spend $250 billion that more directly benefit people who are most in need.

But the issue can look very different from the debtor’s point of view. The typical borrower is in their mid-to-late 30s, and still owes more than $20,000 in loans. A 36-year-old today who went straight to college from high school graduated right into the teeth of the Great Recession, when career-starting jobs were incredibly scarce. For many, graduate school felt like a safe harbor and good long-term investment — or so the college recruiters said. But that meant loans for living expenses along with pricey tuition, which can quickly inflate balances to $100,000 or more.

Income-based loan plans were available to keep monthly bills manageable. Payments could also be pushed off or delayed. But that meant interest charges started to grow and capitalize on top of principal. Meanwhile, the hot real estate market put homeownership out of reach. Both the long-term financial payoff from a college diploma and unproven government promises to someday forgive loans can seem highly theoretical when your net worth is negative and moving in the wrong direction.

The core argument for debt forgiveness is not that college graduates are more deserving than their degree-less peers. It’s that there are enough public resources to help both, and that graduates in the present are worse off than graduates in the past who benefitted from more affordable public university tuition and weren’t thrown defenseless into an economic catastrophe.

The typical college graduate, moreover, only provides so much analytic value for an incredibly diverse population of 43 million people with student debt. Black students, for example, are much more likely than others to take out student loans. They borrow larger amounts, are less likely to be able to pay down principal after leaving college, and are more likely to default — the legacy of centuries of state-sponsored racism that prevents Black households from building assets, and of predatory colleges that continue to target Black communities. The typical Black borrower would see their outstanding balance cut in half with $10,000 forgiven, according to an Education Department analysis.

Women take out the substantial majority of all graduate school loans because they live in a world with highly gendered labor markets that systematically require women to acquire, and pay for, more credentials than men — even though they often earn less.

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Assume the Biden plan is a good idea and that it holds up in court. Is it going to work?

It depends on what you mean by “work.”

The decision to means-test the program and require many borrowers to apply for loan forgiveness is going to create a lot of problems. The political calculus is understandable, and not giving government benefits to rich people is generally progressive. But the vast majority of borrowers fall under the income caps — there just aren’t that many Ivy League lawyers with loans compared to the universe of people with any kind of student debt. The administration’s plan to automatically qualify some borrowers is a step in the right direction, but the application process could end up being anti-progressive in its results.

People with bachelor’s degrees and full-time jobs who were steadily making loan payments before the pandemic could attach a copy of their recent tax returns to the application and quickly see their loan balances drop, or disappear. One of the main things traditional colleges teach, and select for, is being good at filling out paperwork on time.

People who are, for myriad reasons, disconnected from or marginalized in the employment and tax systems will have a harder time. This includes millions of people who are in default on their loans because they aren’t working and therefore aren’t filing federal tax returns. It includes precisely the population of struggling small-balance borrowers the $10,000 benefit is designed to help.

The Biden plan also does nothing to address the underlying causes of the student debt crisis. The Department of Education makes about $90 billion in new student loans every year. Once the pandemic-era repayment pause is lifted, interest will continue to accrue. CRFB estimates that it will take only four years for aggregate federal loan debt to climb back up to the current level of $1.6 trillion.

Most debt forgiveness advocates strongly support some flavor of the “free college” proposals that were first popularized by Bernie Sanders. President Biden included a nationwide free community college program in his 2021 Build Back Better agenda. But that program was jettisoned early in the negotiations and was not included in the final Inflation Reduction Act when it became law last week.

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Existing free college proposals from left-leaning lawmakers like Sanders would only eliminate undergraduate tuition at public colleges and universities. The majority of all loan dollars are borrowed for either private undergraduate colleges or graduate school. In other words, even the most expansive — and rapidly fading — progressive aspirations for higher education reform would leave the source of most student debt untouched.

The debt crisis is often blamed on a broken higher education system. In truth, the problem is that we don’t have a national system at all. The Department of Education lends money to any student who enrolls in an accredited college — and colleges themselves decide who is accredited, with minimal federal oversight. There are no federal controls on what prices colleges can charge and few meaningful regulations on the quality of education they provide. States are free to pull money out of public universities, raise tuition, and let federal loans fill the gap.

If the loan forgiveness program holds up in court, future presidents could declare more jubilees. But making students and parents borrow ever-larger sums for college and then sporadically forgiving loans based on political happenstance is no way to run a railroad. It would almost surely make all of the underlying forces driving up new loan balances even worse.

If, on the other hand, the debt write-off never returns, a lot of people who take out student loans for the first time next year and in the years after that are going to raise their hands and ask why, exactly, they don’t deserve the same.

Kevin Carey writes about education and other issues. He is a vice president at New America, a think tank in Washington, DC.