At face value, the Biden Administration’s plan to cancel up to $20,000 in debt for federal student loan borrowers is admirable. The plan aims to address the borrowers who need relief the most while making repayments simpler.
However, if the student loan debt crisis were a house on fire, this recent debt cancellation round would simply be a bucket of water. It doesn’t address some root causes or populations most burdened with debt.
The Latest in Student Loan Relief
In August, President Biden announced a three-part plan to help cancel up to $10,000 of student loan debt and up to $20,000 for Pell Grant holders. The initiative is meant to relieve federal student loan holders who need it most.
In addition to the $10,000 debt cancellation, the administration announced:
- Readjusting Income-Driven Repayment (IDR) Plans. Previously, borrowers repaying their federal student loans on IDR plans were required to pay back their loans at 10% of their discretionary income. Now, the payments are capped at 5% of a borrower’s discretionary income.
- Amending the Public Student Loan Forgiveness (PSLF) Program. Borrowers who have worked in a PSLF-qualifying workplace may be temporarily eligible to receive credit for previous student loan payments.
In addition to these changes, the Biden administration is promising to increase Pell Grants and make community college free to attend for students.
Finally, in the same announcement, President Biden extended the pause on the student loan repayment freeze until the end of the year, December 31, 2022.
Who Qualifies for Loan Relief?
Not everyone will qualify for the $10,000 - $20,000 cancellation. Borrowers must meet the following:
- Hold a federal student loan. Private student loan borrowers do not qualify for debt cancellation.
- Earn less than $125,000 a year as an individual.
- Earn less than $250,000 a year as a couple.
If a borrower is a Pell Grant recipient and meets the above criteria, they can qualify for up to $20,000 in forgiveness.
While the qualifications are clear, the application process to receive the forgiveness is not. The Biden administration explained that borrowers can apply online for forgiveness through the Department of Education. However, the application is currently unavailable, with officials stating it will be online in the coming weeks.
Biden’s Relief is a Drop in the Bucket
This relief could impact up to 43 million borrowers, explained the White House in its announcement. The administration speculates the forgiveness could wipe out debt for about 20 million borrowers. In addition, the relief targets low- to middle-income Americans earning less than $75,000 annually.
Any student loan debt forgiveness can provide some relief, but this is not enough for many borrowers. Here’s why:
It’s not enough for borrowers who never graduated
Nearly 40 million Americans with student loan debt never completed their 4-year degree. They’re still expected to repay their loans with no degree, which can be more challenging without the benefit of the higher earnings that typically comes with a degree. They’re likely to lose close to $1 million in earnings over their lifetime.
Forgiveness may help lighten the load, but with limited earning potential, many of these borrowers default on their loans, unable to make monthly payments. Borrowers who leave school without graduating are 3x more likely to default on their debt.
It needs to help Pell Grant Recipients more
While Pell Grant recipients can qualify for up to $20,000 of debt cancellation, it’s still not enough. Statistically, Pell Grant recipients are more likely to be minorities from low-income families. The Pell Grant, on average, covers 19% of the cost of attending a four-year school today. Compare that to when the program launched in 1975 and covered nearly 80% of the cost of attendance.
These students or their families are much more likely to take on additional debt to cover the cost of education.
Pell Grant recipients are more likely to be low-income and minority students, graduating with a much higher debt burden than their peers. Black borrowers graduate with close to $45,000 in federal student loans on average, according to the Federal Reserve System. Moreover, due to income disparity and the familial wealth gap, the average Black student loan borrower owed close to 95% of their original amount after 20 years.
For these borrowers, who are graduating with a high debt burden and compounding interest, debt cancellation provides only a fraction of the assistance they need.
It doesn’t address the rising cost of education
The Biden administration’s debt cancellation may help some borrowers, but it doesn’t get to the root cause of student loan debt; the rapidly rising cost of education in the United States.
According to CollegeBoard, since 1992, the cost of attending four-year private and public universities has skyrocketed. In 1992 the cost to attend:
- A four-year public institution is $4,160 annually
- A four-year private institution is $19,360 annually
Compare that to the 2020-21 school year, where the cost to attend:
- A four-year public institution is $10,740 annually
- A four-year private institution is $38,070 annually
Education costs rise faster than income for most families, meaning more students need to take out loans to attend school. While debt cancellation will make a dent in existing debt, it won’t tackle these rising costs.
President Biden’s student loan debt cancellation is a step in the right direction, but it barely scratches the surface for many borrowers with more significant debt burdens. It glosses over some of the root causes associated with the rising cost of education and neglects to address the racial disparity among student loan borrowers.
Student loans are convoluted, and navigating the system on your own makes it even harder. Chipper wants to get to the root of the student loan debt crisis, helping you make better-informed choices in a system built to confuse you. Take a look at our community for free, downloadable resources.