In the USA, that financial help has come at a hefty cost. It is reported that approximately 45 million Americans collectively owe the federal government more than $1.7 trillion in student debt. For many, the overwhelming burden of living paycheck to paycheck in order to repay their student loans, afford their mortgage and bills, cover any unexpected healthcare costs, put food on the table, and raise a family is causing significant stress. So, when a student loan payment freeze was introduced in 2020 as a way to help those struggling to make ends meet during the COVID-19 pandemic, there was a combined sigh of relief. But all good things must come to an end, and millions of Americans will once again be expected to resume their student loan payments from 1 January 2023.
However, when President Biden made a promise during his campaign trail to cancel at least $10,000 of student debt per borrower, there was a glimmer of hope for those with outstanding payments. Now, after a year of consideration, on Wednesday, 24 August 2022, it was officially announced that this promise would become a reality and that eligible Americans would finally be able to file an application for student loan forgiveness. Here is what students and student loan borrowers need to know about the plan.
Joe Biden’s presidential campaign kicked off in April 2019. Among the many initiatives and promises made throughout his campaign trail and in-person canvassing effort, one pledge took center stage – Biden’s promise to cancel $10,000 in federal student loans per borrower. With the price of college skyrocketing and personal finances reeling due to the pandemic and inflation, millions of Americans had to make choices between paying their rent and paying their student loan. This agonizing predicament has meant that the federal government is owed more than $1.7 trillion in student debt. Education sure doesn’t come cheap – but how did things get so bad?
Over the past decades, the cost of college has risen dramatically. The average tuition price and the average debt held by students at graduation has more than doubled in the last thirty years, despite the average starting salary of college graduates remaining nearly static. Still, college enrollment grew to all-time highs in the early twenty-first century, and having a college degree still carries a lot of weight for many industries in the United States. The reality for many Americans is that a career with a living wage, necessary benefits, and the opportunity for advancement requires a college degree. And even that might not be enough to pay off the loans incurred during the degree. The average student-loan borrower now leaves their undergraduate studies with $32,880 in debt, with most borrowers holding balances between $25,000 and $50,000, and interest rates on federal loans ranging from 5-7.5 percent. Borrowers who end up in forbearance or deferment, opt for extended or income-driven repayment plans, or default on their loans regularly find that their balances increase instead of decrease, despite continuing to make or resuming payments.
When Biden acknowledged that measures needed to be enforced to offer relief to student loan borrowers, there was much debate. Some key Democratic supporters believe $10,000 in forgiveness isn’t enough, with the likes of Senate Majority Leader Chuck Schumer and Democratic Senator Elizabeth Warren releasing a joint statement that said, “Cancelling $50,000 in federal student loan debt will help close the racial wealth gap, benefit the 40 percent of borrowers who do not have a college degree and help stimulate the economy.”
While push-back from the Republicans was also made known – Senate Minority Leader Mitch McConnell openly opposed student loan forgiveness and said, “President Biden’s student loan socialism is a slap in the face to every family who sacrificed to save for college, every graduate who paid their debt, and every American who chose a certain career path or volunteered to serve in our Armed Forces in order to avoid taking on debt.
It’s been more than two years since the COVID-19 pandemic gripped the world, and to this day, we are still dealing with the economic devastation it caused. In the US, a student loan payment freeze was introduced by the Trump administration back in March 2020 as a way of helping borrowers adjust financially during the outbreak. This meant that student loan repayments could be paused, no interest would be charged, and no debt would increase if people chose to place their federal student loans into a ‘deferment.’
When President Biden was inaugurated on 20 January 2021, he continued to support the student loan payment freeze, which has been extended seven times in total (twice by Trump and five times by President Biden) since it was introduced. But now the time has come for the final freeze extension as repayments are set to resume from 1 January 2023.
This is not the action the Biden administration has taken to alleviate the burden of student debt. Since his inauguration in 2021, Biden and his Department of Education have worked to improve and expand Public Service Loan Forgiveness programs, making it easier for borrowers who qualify to get their loans forgiven.
The administration has also focused on targeted debt relief for borrowers who were defrauded or misled. How commen is it for students to be defrauded by their colleges? You might be surprised. As well as public and private colleges in the US, there are a number of ‘for-profit’ institutes across the country. A for-profit college is one that relies on donations from investors and survives by – you guessed it – making a profit for its shareholders.
But over the years, a growing number of student fraud complaints have been linked to some of these for-profit colleges. Major marketing campaigns to encourage enrollment using deceptive advertising, false claims about partnerships with well-known corporations, and the promotion of incorrect graduation rates have caused scandals.
Now, 200,000 student loan borrowers who were victims of fraud by for-profit colleges will receive automatic student loan forgiveness. A group discharge announcement made on Tuesday, 16 August 2022, stated that any student loan borrower in attendance of ITT Technical Institutes (ITT) between 1 January 2005 and September 2016 (this end date being the point at which the government stopped ITT’s access to millions of dollars in federal loans and grants, causing the institution to close down once and for all) would have their student loan debt erased and that they wouldn’t even need to submit a ‘Borrower Defense to Repayment’ application for this to happen. Students who attended the for-profit Corinthian Colleges were in receipt of similar relief back in June 2022 too.
In Joe Biden’s hugely anticipated student loan forgiveness plan, which was announced on Wednesday, 24 August 2022, a proposal for changes to be made to income-driven repayments was also promised. Borrowers will have their income-driven repayment plan monthly payments capped to 5 percent of their discretionary income (‘discretionary’ meaning the amount that is left after paying for essentials like rent/mortgage and food). Any unpaid interest will be taken over by the Department of Education, which ultimately means that interest on your loan won’t build up if you pay your monthly payments.
Furthermore, if you have worked in American public service (state, federal, local, tribal government or non-profit organization) for 10 years or more, you may be eligible for the Public Service Loan Forgiveness Plan. In order to qualify, you must have made 120 qualifying monthly payments under a legitimate repayment plan while working full-time for a qualifying employer. If this is the case, the remaining balance on your student loan will be forgiven. You will need to apply for PSLF relief for these measures to be enforced.
So, what does this mean for student loan borrowers? Here’s a final overview of everything we know.
On Wednesday, 24 August, Joe Biden announced that up to $10,000 in federal student loan debt would be canceled per borrower for anyone earning less than $125,000 a year as an individual – or less than $250,000 for married couples or heads of households. Students who went to college on Pell Grants (usually given to undergraduates who display exceptional financial need) can be forgiven up to $20,000 in student loan debt. The amount of relief you receive is capped at the amount of your outstanding debt – for example, if you are eligible for $10,000 of student debt relief but you only have a balance of $7,000 left to pay, you will only receive $7,000 in forgiveness.
The U.S Department of Education should have all the relevant data they need in order to process the student loan forgiveness; however, if you’re concerned that they don’t have your income data, a simple application form will be available for you to complete by early October 2023. You can sign up to the Department of Education subscription page for further announcements about when the application is open – it is a good idea for you to complete the form if you are eligible, just in case. Once filled in, you should expect to receive your student loan forgiveness payment within 4-6 weeks. You should apply before Tuesday, 15 Novemeber 2023, at the latest so that you can receive relief before the student loan payment freeze expires on December 31, 2022.
Will this forgiveness finally give Americans the relief and reassurance they need to reduce student debt now and in the future? Only time will tell.
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