In August 2022, President Joe Biden made a promising announcement to cancel up to $20,000 in federal student loan debt for lower- and middle-class Americans. This news was a long-awaited ray of hope for struggling individuals burdened by student loan debt. However, the Supreme Court later overturned Biden’s decision, leaving many wondering about the fate of student loan forgiveness.
When it comes to canceling federal student loans, there’s an important thing to consider: who will pay for it in the end?
What is the Biden Administration’s student loan forgiveness plan?
In 2022, President Biden announced a three-part plan that aimed to provide relief to American working families as they recovered from the strains caused by the COVID-19 pandemic. This plan included targeted debt relief as part of a comprehensive effort to address the growing burden of college costs and make the student loan system more manageable for working families. The original plan, which has since been blocked, included the following actions by the Department of Education.
Targeted debt relief: The Department of Education was set to provide up to $20,000 in debt cancellation to Pell Grant recipients with loans held by the Department of Education. Non-Pell Grant recipients would have been eligible for up to $10,000 in debt cancellation. To qualify for this relief, borrowers needed to have an individual income of less than $125,000 ($250,000 for married couples). It was ensured that high-income individuals or households in the top 5% of incomes would not benefit from this action.
Extension of the pause on federal student loan repayment: To facilitate a smooth transition to repayment and prevent unnecessary defaults, the pause on federal student loan repayment was planned to be extended one final time through December 31, 2022. Borrowers were informed to expect a resumption of payments in January 2023.
These actions were part of the original plan announced by President Biden but have been blocked and are no longer in effect.
Who shoulders the financial responsibility for student loan debt cancellation?
Canceling federal student loans will cost the government money that comes in part from taxpayer dollars. The Congressional Budget Office, which crunches the numbers, said President Biden’s plan to cancel student loans could have added $400 billion to the government’s expenses. But it also mentioned that the estimate was uncertain because it’s hard to predict how many people would have actually paid back their loans if Biden didn’t take action, and how much they’ll still repay.
Biden did mention at a press conference that there’s enough deficit reduction to cover the program’s costs. The deficit is basically the difference between how much money the government spends and how much money it takes in.
Experts agree that canceling student loans would increase the deficit. But here’s where they don’t see eye to eye — how big of an increase would it be and how can the government eventually make up for the costs?
How consumers could potentially face the consequences of deficit reduction?
When it comes to student loan forgiveness and the economy, there are different viewpoints. Some worry that a large national debt makes the economy vulnerable to rising interest rates and inflation. However, others argue that running a deficit hasn’t had major negative effects in recent years.
In fiscal year 2021, the government had a $2.8 trillion deficit from COVID-19 relief spending. This deficit accounted for about 13% of GDP, the second largest since World War II. On average, deficits over the past five decades have been around 3% of GDP. Higher deficit percentages make it harder to repay debt and increase the risk of default, which could cause global financial panic.
A report by the U.S. Government Accountability Office warns that current federal spending is unsustainable and risks the country’s financial health.
To reduce the deficit, there are two main options: cut spending or raise taxes. Some analysts argue that the cost of student loan forgiveness will eventually affect the general public. Cutting spending may mean reductions in important social programs, like school lunches or Social Security benefits.
Raising taxes is another option, which could include increasing individual income tax rates or reducing popular deductions, like charitable giving. President Biden promised not to raise taxes on the middle class, but future administrations might make different choices.
Supporters of canceling student loans believe that those who benefit the most should bear the financial responsibility. They suggest increasing taxes on corporations, high earners, and the wealthy, as they have benefited from having a more educated workforce.
There are concerns about the potential consequences of student loan forgiveness, such as increased inflation. Some predict a modest impact on inflation rates from Biden’s plan, but the actual impact may be lower.
Even if loan forgiveness doesn’t greatly affect inflation, economists warn of potential consequences, like higher tuition costs. Colleges may expect future loan forgiveness and increase their prices accordingly.
Latest update: the Supreme Court blocks the student loan forgiveness plan
When the Supreme Court blocked President Biden’s student loan forgiveness plan in June, it was a huge setback for millions of Americans who were hoping for relief from their student loan debt.
To address this, the Secretary of Education created an alternative path to debt relief for working and middle-class borrowers. This is being done through a rulemaking process, using the Secretary’s authority under the Higher Education Act.
The Department of Education has finalized a repayment plan that is the most affordable ever created. This plan will be available to borrowers starting this summer, even before loan payments are due. Many borrowers will not have to make monthly payments under this plan, and those who do will save over $1,000 per year.
To provide further support, the Department is implementing a 12-month on-ramp to repayment. This period, running from Oct. 1, 2023, to Sept. 30, 2024, aims to protect financially vulnerable borrowers who may miss monthly payments following the restart of payments. During this period, they will not be considered delinquent, reported to credit bureaus, placed in default, or referred to debt collection agencies.
Biden is working on additional forgiveness options, but experts warn they could face the same challenges as the original forgiveness program.
What can you do with your existing student loan debt?
When it comes to your existing student loan debt, there are several steps you can take to manage it effectively once payments resume. Here are some tips to consider.
Familiarize yourself with your options
Contact your loan servicer to understand the repayment plans available to you. It can provide information on eligibility for different programs and help you choose the most suitable option based on your financial situation.
Explore refinancing or consolidation
If you have multiple student loans, you may consider refinancing or consolidating them into a single loan with a potentially lower interest rate. This process can simplify your repayment process and potentially save you money on interest.
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Consider income-driven repayment plans
Income-driven repayment plans calculate your monthly payments based on your income and family size. These plans can make your payments more manageable, especially if you have a lower income. Contact your loan servicer to see if you qualify for an income-driven repayment plan.
Budget wisely
Create a budget that takes into account your income, expenses, and loan payments. Identify areas where you can cut back on non-essential expenses and allocate more funds towards your loan payments. These actions will help you stay on track and ensure that you can meet your repayment obligations.
Stay informed about developments
Keep up with the latest updates and changes in student loan policies. Follow news related to student loans and regularly check for new programs or options that may become available. Being informed will help you make the best decisions for your financial situation.
Prepare for payment resumption
While there may be uncertainties surrounding student loan policies, it is crucial to be prepared for the resumption of payments. Set aside funds in your budget to cover your loan payments, even if there are potential changes in the future.
Remember, each individual’s financial situation is unique, so it’s essential to assess your specific circumstances and consult with your loan servicer to determine the best approach for managing your student loan debt effectively.
Exploring Options Amid Uncertainty
The topic of student loan debt forgiveness is controversial, with ongoing debates over who will bear the expense and what the final program will cover.
If you are a student feeling anxious about repaying your loans, there are still options available to alleviate some of the burden. Exploring alternative repayment plans, considering loan consolidation or refinancing, and staying informed about potential developments can provide some relief and support in managing your student loan debt. You’ll want to stay updated on policy changes and seek guidance to make informed decisions about your financial well-being.
FAQ
Will private student loans be forgiven under Biden’s plan?
No, President Biden’s student loan forgiveness plan primarily focuses on federal student loans. Private student loans are not included in the proposed forgiveness.
How much student loan forgiveness does President Biden propose?
President Biden had proposed up to $10,000 or $20,000 in student loan forgiveness. The specific amount would depend on whether the borrower is a Pell Grant recipient and the type of loan held by the Department of Education. Please note, this proposed plan was overturned by the Supreme Court, and the new plan could also face issues.
Can all student loan borrowers receive forgiveness under Biden’s plan?
No, not all student loan borrowers would be eligible for forgiveness under President Biden’s plan. Eligibility would be based on factors such as income level, loan type, and other criteria. It is important to review the specific details of the plan to determine if you qualify for forgiveness.
