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The debt forgiveness comes after months of deliberations in the White House over fairness and fears that the plan could make inflation worse ahead of the midterm elections.
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Zolan Kanno-Youngs, Stacy Cowley and
WASHINGTON — President Biden announced a plan on Wednesday to wipe out significant amounts of student loan debt for tens of millions of Americans, saying he would cancel $10,000 in debt for those earning less than $125,000 per year and $20,000 for those who had received Pell grants for low-income families.
The debt forgiveness, although less than what some Democrats had been pushing for, comes after months of deliberations in the White House over fairness and fears that it could exacerbate inflation before the midterm elections.
“All of this means people can start finally to climb out from under that mountain of debt,” Mr. Biden said in remarks from the White House. “To finally think about buying a home or starting a family or starting a business. And by the way, when this happens, the whole economy is better off.”
Mr. Biden also announced that a pandemic-era pause on student loan payments, which has been in effect since March 2020, would expire at the end of the year. The timing for the debt relief is uncertain; the Department of Education said it would set up an application process by the end of the year.
Across the United States, 45 million people owe $1.6 trillion for federal loans taken out for college — more than they owe on car loans, credit cards or any consumer debt other than mortgages.
Susan Rice, the White House domestic policy adviser, said the administration had not yet determined how much the student debt relief will cost because it will depend on the number of people who apply for it. By some estimates, however, it could cost $300 billion or more.
Mr. Biden has been agonizing over how to address the student debt issue for months, under pressure from progressive Democrats who say debt forgiveness is necessary to address racial disparities in the economy. But critics say widespread debt forgiveness is unfair to those who tightened their belts to pay for college. And some economists have raised concerns that debt relief will add to inflation by giving consumers more money to spend.
The White House sought to address the economic concerns by targeting the relief.
Students who received Pell grants will be eligible for $20,000 in debt forgiveness on their loans. About 60 percent of borrowers have received Pell grants, and the majority come from families making less than $30,000 a year. The Education Department estimates that 27 million borrowers will qualify for up to $20,000 in relief.
Millions of other borrowers will be eligible for $10,000 in debt relief, as long as they earn less than $125,000 a year or are in households earning less than $250,000. Borrowers will be assessed based on the income they reported in 2021 or 2020.
“I was standing in my dorm room when I heard this, and I just let out a scream,” said Marlene Ramirez, 25, who relied on Pell grants and other aid to pay for her undergraduate studies.
Many will benefit. President Biden’s executive order means the federal student loan balances of millions of people could fall by as much as $20,000. Here are answers to some common questions about how it will work:
Who qualifies for loan cancellation? Individuals who are single and earn $125,000 or less will qualify for the $10,000 in debt cancellation. If you’re married and file your taxes jointly or are a head of household, you qualify if your income is $250,000 or below. If you received a Pell Grant and meet these income requirements, you could qualify for an extra $10,000 in debt cancellation.
What’s the first thing I need to do if I qualify? Check with your loan servicer to make sure that your postal address, your email address and your mobile phone number are listed accurately, so you can receive guidance. Follow those instructions. If you don’t know who your servicer is, consult the Department of Education’s “Who is my loan servicer?” web page for instructions.
How do I prove that I qualify? If you’re already enrolled in some kind of income-driven repayment plan and have submitted your most recent tax return to certify that income, you should not need to do anything else. Still, keep an eye out for guidance from your servicer. For everyone else, the Education Department is expected to set up an application process by the end of the year.
When will payments for the outstanding balance restart? President Biden extended a Trump-era pause on payments, which are now not due until at least January. You should receive a billing notice at least three weeks before your first payment is due, but you can contact your loan servicer before then for specifics on what you owe and when payment is due.
Ms. Ramirez, the first in her family to go to college, used the grants to cover two years of study at a community college, then transferred to the University of California, Los Angeles. After graduating in 2020 with a bachelor’s degree in anthropology, she still has $25,000 in federal loans that she had used to cover her housing and living expenses.
“This will almost wipe that out,” said Ms. Ramirez, who is finishing a master’s degree at the London School of Economics. “I’m shaking right now. This is life changing.”
But critics — including some members of Mr. Biden’s own party — said the move was deeply unfair.
Jason Furman, a Harvard economist and former top economist for President Barack Obama, said the plan “would unnecessarily provide tens of thousands of dollars to many high-income households in a way that goes well beyond even what he promised in the heat of a Democratic primary when the problem facing the country was low inflation — not high inflation.”
The Republican National Committee released a statement slamming the program as “Biden’s bailout for the wealthy.”
Senator Ben Sasse, Republican of Nebraska, said the plan “forces blue-collar workers to subsidize white-collar graduate students. Instead of demanding accountability from an underperforming higher-education sector that pushes so many young Americans into massive debt, the administration’s unilateral plan baptizes a broken system.”
Because Mr. Biden used executive action, rather than legislation, to forgive the loans, legal challenges are expected. It is unclear, however, who would have the standing to press their case in court. A recent Virginia Law Review article argued that the answer might be no one: States, for example, have little say in the operation of a federal loan system.
On its face, the move could cost taxpayers about $300 billion or more in money they effectively lent out that will never be repaid. But the true cost is harder to calculate, and could be smaller, because much of that debt was unlikely ever to be repaid. More than eight million people — one in five borrowers with a payment due — had defaulted on their loans before the coronavirus pandemic. Many of those people carried fairly small balances and will now be eligible for loan cancellation.
What we consider before using anonymous sources. Do the sources know the information? What’s their motivation for telling us? Have they proved reliable in the past? Can we corroborate the information? Even with these questions satisfied, The Times uses anonymous sources as a last resort. The reporter and at least one editor know the identity of the source.
Mr. Biden also proposed various changes to the repayment system — which would need to be enacted through rule-making by the Education Department — that would slash many borrowers’ monthly bills. He is seeking to let those with undergraduate loans cap their payments at 5 percent of their discretionary monthly income, down from the 10 percent ceiling now in place on most income-based payment plans.
He is also seeking to have the government cover the monthly interest for those making payments — even if their payment is zero, because their income is low — so that balances will not balloon. Under the current system, interest still accrues, and many borrowers find themselves falling deeper into debt even as they make their monthly payments.
Many Democratic lawmakers and progressive groups have argued that addressing economic racial disparities would require forgiving $50,000 of debt, citing reports showing that Black and other nonwhite borrowers end up with higher average loan balances than their white peers.
“Targeting twice as much relief to Pell recipients helps close the racial wealth gap,” said Senator Elizabeth Warren, Democrat of Massachusetts, who has pressed for widespread student debt cancellation.
Ms. Warren said she would keep up the pressure for more debt relief, but she praised Mr. Biden’s announcement as “historic.”
“No president in history has reached so directly into the lives of so many millions of working people and said, ‘You invested in yourself to get an education, and the rest of the country wants to help you with that,’” she said.
Representative Tony Cárdenas, a California Democrat who met with the White House to advocate debt cancellation, said even the limited relief could be the galvanizing factor Mr. Biden’s party needs before the midterms in November.
“That’s a lot of young people that are going to be able to have a sigh of relief,” Mr. Cárdenas said.
He and other members of the Congressional Hispanic Caucus helped ramp up pressure on Mr. Biden this spring, when they said he had indicated in a private meeting that he intended to provide some form of debt relief for Americans. Shortly afterward, the president publicly said he was considering the move and would announce details in the coming weeks.
But inside the White House, Mr. Biden’s top aides were debating the political and economic ramifications of the decision. According to people familiar with his thinking, the president was concerned that loan cancellation would be seen as a giveaway that would be an affront to those who had paid their or their relative’s tuition. Some top aides also argued that Mr. Biden lacked the legal authority to move forward with the sweeping loan forgiveness and that he should work with Congress instead of using executive action.
Soaring inflation also complicated the process.
Mr. Biden’s economic advisers, however, made the case that by resuming loan payments and pairing the loan forgiveness with income caps, the cancellation would have a negligible effect on rising consumer prices. Arindrajit Dube, an economist at the University of Massachusetts, Amherst who consulted with administration officials on student loans, said in an interview that the additional consumer spending spurred by the bill would be a “drop in the bucket” in the U.S. economy and unlikely to add to inflation.
“There are principled reasons to be both supportive and opposing” of the plan, Mr. Dube said, including questions of economic fairness and who benefits from loan forgiveness. But, he said, “I just don’t see inflation being the issue here.”
Senate Democrats continued to make direct appeals to the White House for loan forgiveness in the days leading up the decision. Senator Chuck Schumer of New York, the majority leader, as well as Ms. Warren and Raphael Warnock of Georgia, met with the president’s chief of staff, Ron Klain, and Brian Deese, one of Mr. Biden’s top economic advisers, on Friday.
Many economists warned the move could have damaging consequences for students and taxpayers in the future, by encouraging colleges and universities to raise prices with the federal government footing the bill.
Mr. Biden’s plan, including its limits on future loan repayment by borrowers, “would be a massive subsidy to the exact sector that created this mess with ever-rising tuition and fees,” said Melissa Kearney, a University of Maryland economist who directs the Aspen Economic Strategy Group. “We should be taking steps to rein in higher-ed pricing, not further subsidize higher-ed tuition and living expenses.”
Mary-Pat Hector, a graduate student at Georgia State University, said Mr. Biden’s plan was an important first step to support those disappointed by the administration’s failure to accomplish other policy goals, such as providing two free years of community college.
“They were told: Vote because your life depends on it,” said Ms. Hector, 23, who has $50,000 in loans from Spelman College. “And then we’re here on the ground, months away from midterm elections, and people in these communities are wondering, ‘Well, does my vote really matter?’”
Ms. Hector said that in addition to her own college debt, her mother also borrowed to pay for her education. She criticized the administration’s decision to impose limits on who would receive loan forgiveness based on salary, noting that while some of her peers earned a healthy income, they would also be responsible for supporting younger siblings who might borrow to attend college.
“You’re still in inescapable debt from school, and you’re still taking care of your family and community,” said Ms. Hector, an activist with the organization Rise, which has pushed for loan forgiveness. “My parents are probably in lifetime debt to get me in that position, and I’m going to have to repay them by ensuring my little brother is going to school. That’s the pressure you have.”
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