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 2. Personal Finance


BIDEN CANCELING $10,000 OF STUDENT LOANS, $20,000 FOR PELL GRANT RECIPIENTS

Last Updated: Aug. 24, 2022 at 1:01 p.m. ET First Published: Aug. 24, 2022 at
12:07 p.m. ET
By

JILLIAN BERMAN

  comments


THE WHITE HOUSE SAID THE PLAN WOULD ELIMINATE THE DEBT OF ABOUT 20 MILLION
BORROWERS

STUDENT LOAN BORROWERS HAVE BEEN DEMANDING STUDENT DEBT CANCELLATION FOR YEARS.

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The question on millions of student loan borrowers’ minds was settled Wednesday,
as the Biden administration announced it would cancel $10,000 in debt for
borrowers earning up to $125,000 and provide an additional $10,000 in relief to
borrowers who received a Pell grant when they went to college. 

The administration also announced it would extend the pause on student loan
payments, collections and interest, through December 31. The freeze was
scheduled to expire on August 31. 

“Here’s what my administration is going to do ,” Biden told reporters Wednesday,
“provide more breathing room for people so they’re less burned by student debt
and quite frankly to fix the system itself.”


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The White House said the announcement would cancel the debt of roughly 20
million borrowers and said that nearly 90% of the relief would go to households
earning less than $75,000 a year. No household in the top 5% of incomes would
receive relief.

Still $10,000 in broad-based cancellation, particularly with a means test, is
not as drastic as some lawmakers, advocates and borrowers themselves had hoped.
At the same time, critics of mass student debt relief have charged that it would
provide a benefit to Americans near the top of the income scale and could add
fuel to an already inflationary economic environment. 

“For millions of people and millions of families it would have a huge effect,”
Abby Shafroth, director of the Student Loan Borrower Assistance Project at the
National Consumer Law Center, said of the policy announced Wednesday. “What it
would not do is create a long term change by itself to the student loan system.
That’s why we’re also advocating for the Department of Education, the Biden
Administration as well as Congress to make more permanent reforms to the student
loan system so we don’t have more borrowers facing this crisis again.”



How will Biden’s student debt relief plan impact you? Let us know! Email
jberman@marketwatch.com

Since Biden took office, the question of whether his administration would
provide some kind of broad-based student debt relief has loomed over his
presidency. For his part, Biden always expressed some hesitation at canceling
the debt through executive action and particularly at discharging any amount
larger than $10,000.  

Instead, the Biden administration had focused on so-called targeted forgiveness,
discharging debt for borrowers, including those scammed by their schools and
borrowers with severe disabilities, who were waiting on promised relief from
government programs for years. Republican lawmakers have criticized any relief
the Biden administration has provided to student loan borrowers as an unfair
cost to taxpayers. 

Senior administration officials framed the plan as part of that pattern of
focused relief, saying on a call with reporters that it offers “targeted debt
relief to lower and middle income families.”  If all borrowers claim the relief
to which they’re entitled, about 43 million borrowers would benefit from the
plan, the White House said. 



ADVOCATES WATCHING IMPLEMENTATION CLOSELY

It remains to be seen how easy it will be for eligible borrowers to claim the
forgiveness. Department of Education officials said they would announce details
on how borrowers can receive the relief “in the coming weeks.”  Biden
Administration officials have said borrowers will need to fill out a “simple”
form attesting to their income. The agency estimates that nearly 8 million
borrowers may be able to have their loans discharged automatically because
they’ve already provided the relevant income information to the Department. 


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“We’re going to be watching the government to make sure they’re actually
delivering on this,” Shafroth said.

Advocates like Shafroth worry that a means test would actually wind up excluding
the most vulnerable borrowers because they’re less likely to have the time and
resources necessary to navigate a bureaucratic application process. 

Even without a means test, high-income borrowers would receive an almost
miniscule percentage of the benefit of the debt relief plan. Canceling $10,000
per borrower without an income cap would mean that about 1.07% of the relief
would accrue to the top 5% of the income distribution, according to the Penn
Wharton Budget model. The analysis didn’t look at $20,000 in debt forgiveness,
but did find that if the government were to cancel $50,000 in student debt
without an income cap that less than 5% of the benefit would accrue to the top
5% of earners. 

PELL GRANT COMPONENT COULD HELP TARGET RELIEF

Providing additional relief to Pell grant recipients could help direct the aid
to those who need it the most, though it wouldn’t perfectly capture the student
loan borrowers who are most vulnerable today. The Pell grant is the money the
federal government provides to low-income students to attend college. 

That component of the debt relief plan reflects that the Pell grant program,
which was intended to ensure that low-income students didn’t have to borrow to
attend college or at worst would borrow very little, hasn’t lived up to its
potential, said Mark Huelsman, director of policy and advocacy at the Hope
Center for College, Community and Justice at Temple University. 


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More than 70% of students who graduated with any federal student loans received
a Pell grant, according to a 2020 analysis from The Institute for College Access
and Success, a research and advocacy group. These borrowers also have about
$4,500 more in debt than non-Pell graduates, the analysis found. 

“The promise of the Pell grant was to equalize college opportunity and equalize
the cost for low-income students,” Huelsman said. By providing additional
cancellation to former Pell grant recipients, the White House announcement,
“retroactively restores some of the promise of the Pell grant,” he added.   

Using the Pell grant as a proxy for who qualifies for a certain amount of relief
will also likely make it easier for the Department of Education to provide a
large cohort of borrowers with cancellation automatically, Huelsman said. The
agency doesn’t have income information for all of the borrowers in its student
loan portfolio, but it does know which borrowers used a Pell grant in college. 

Still, Huelsman said, using Pell grants to target loan forgiveness is an
“imperfect” way to figure out who is in need of financial help. Some low-income
students may have used private loans so they won’t benefit from any cancelation,
others may not have qualified for or used Pell grants in college. 

Sorting through these and other knotty questions is part of the reason why many
student loan advocates are concerned about means testing relief.


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“The better option is no income test,” Huelsman said, adding that if
policymakers are truly concerned about wealthy households benefiting, there’s
another way to address it: “we have a tax system for that,” he said. “It’s not
easily done through student loan policy.”  

HISTORY OF BORROWERS STRUGGLING TO NAVIGATE RED TAPE

Adding fuel to advocates’ worry about borrowers’ ability to manage any red tape
is historical experience. Over the past several years, advocates have watched as
borrowers struggle to access debt relief they’re entitled to under the law.
They’ve charged that the companies hired by the government to manage its student
debt portfolio have thrown obstacles in the way of borrowers taking advantage of
some of the benefits of the federal student loan program. 

Student loan servicers are already warning that Biden’s debt relief initiative
may be difficult to implement. Sorting through questions like which loan to
apply the debt cancellation to, how it will interact with other debt relief
programs already on the books and actually operationalizing those decisions will
require time-consuming programming on the back end of the student loan payment
system, said Scott Buchanan, the executive director of the Student Loan
Servicing Alliance. The means test will also add to the complexity, he said. 

More immediately, because servicers didn’t receive any details of the
announcement in advance, Buchanan said he’s also worried that the companies will
be hit with a deluge of calls about the plan and have little information to
provide. He said “there’s no need” to call servicers now because they don’t have
guidance on the announcement yet and said servicers or the Department of
Education would reach out with more information. 


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“People are going to be on hold for a long time only to be told we don’t have a
lot of answers,” Buchanan said. “Our job is customer service in many respects.
That’s going to be a poor customer experience and I don’t know that there’s
anything we can do about that.” Buchanan advised borrowers not to make any
financial changes until they see the cancellation show up in their accounts. 

Though borrowers will likely have to wait to feel the impact of the relief,
Wednesday’s announcement at least provides some certainty after months of debate
over what the President would do. In the past several days, prominent economists
have expressed concern that any student debt relief could boost inflation.

A senior administration official told reporters on the call that the White House
believes the combination of restarting payments and canceling debt would largely
offset one another and therefore likely wouldn’t boost inflation. Other
economists agree. 

“By resuming student loan payments at the same time as we provide targeted
relief were taking an economically responsible course,” Biden told reporters
Wednesday. Officials said the Biden Administration won’t be lengthening the
pause past December 31, calling the extension announced Wednesday “final.” “It’s
time for the payments to resume,” Biden said.

In his remarks, the President acknowledged that he could face criticism both
from advocates of more generous debt relief and from those who think the plan is
too generous. “Not everything I’m announcing today is going to make everybody
happy,” he said, adding that he believes his plan is “responsible and fair.”


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“It focuses the benefit on middle-class and working families, it helps both
current and future borrowers and it will fix a badly broken system,” Biden told
reporters.  

Congressional leaders, including Majority Leader Chuck Shumer and Sen. Elizabeth
Warren, a Democrat of Massachusetts, had called on the President to cancel
$50,000 in student debt. Other advocates urged cancellation on a similar level
or for the White House to even wipe out borrowers’ entire student debt burden. 

“We had hoped for a greater amount of relief,” said Persis Yu, senior policy
director and managing counsel at the Student Borrower Protection Center, a
borrower advocacy group. “It’s worth both highlighting and celebrating what it
will do but also acknowledging what it’s not going to do.”  

For example, while the policy will likely help millions of defaulted borrowers,
who face the most severe consequences of the student debt system, by canceling
their loans, it likely won’t make much of a difference for borrowers with high
balances who are paying off their debt as a percentage of their income. “They
might be making the same payments as they would otherwise,” Shafroth said. 

Canceling $10,000 also likely won’t put a huge dent in the racial wealth gap.
Providing between $50,000 and $75,000 in debt relief would provide the largest
marginal gains for Black households relative to white ones, according to a 2021
analysis of the impact of any debt forgiveness policy on racial equity. Still,
the White House touted the decision to direct additional relief to Pell grant
recipients as one that would narrow the racial well gap since Black students are
more likely than their white counterparts to receive Pell grants. 

Regardless of the amount canceled, proponents and detractors of the Biden
Administration’s announcement say it won’t solve the nation’s student loan
problem. Advocates of debt relief have argued that in addition to canceling
student debt, lawmakers should work to make higher education more affordable on
the front end, including by better subsidizing the nation’s public colleges.  

Shafroth said policymakers should also work to get rid of the more onerous
aspects of the student loan repayment system that cause borrowers’ balances to
balloon even while they’re throwing money at their debt. The Biden
Administration also announced Wednesday that the Department of Education is
proposing reforms to the loan repayment plans that allow borrowers to pay back
their debts as a percentage of their income, which could help to address that
problem.  

The proposal includes cutting the percentage of monthly income borrowers with
undergraduate loans will be required to devote to their debt from 10% to 5% and
canceling loan balances after 10 years of payments for borrowers who originally
took on $12,000 or less in debt. 

“We need long term systematic changes both so that loans aren’t being originated
in amounts that borrowers are unlikely to be able to repay,” Shafroth said, “And
so that once borrowers are in repayment they have good affordable repayment
options with a true safety net.” 


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LOANS, $170K IN CAR LOANS AND A MORTGAGE I PAY $4,500 A MONTH ON. DO I NEED
PROFESSIONAL HELP?

Have an issue with your financial adviser or have questions about hiring a new
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ABOUT THE AUTHOR

Jillian Berman


Jillian Berman covers student debt and millennial finance. You can follow her on
Twitter @JillianBerman.

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