Will Your Student Loans be Cancelled? Here’s what the Biden Administration has Planned.

Student loan debt has increased by over 102% over the last decade, leaving borrowers with $1.7 trillion dollars in debt as of 2021. Student loans set students up to have an unsuccessful future financially: they start their financial lives with thousands of dollars in debt that must be repaid before they even have a good understanding of their financial lives. Worse, the average interest rate for all outstanding student loans is a whopping 5.8%. For comparison, the average inflation rate for the last decade has been approximately 2%, and the average interest rate for a 30-year fixed mortgage over the same time period has been approximately 4%. Further, money that borrowers spend servicing their loans would benefit the economy as a whole more were it spent as discretionary income rather than sitting in a commercial bank or the Federal Reserve. The Biden administration has taken steps to mitigate the setbacks that students face concerning their financial future. The federal government owns 92% of student loans, so these changes affect the majority of student loan borrowers in the United States. 

Recent headlines such as “Student Loan Cancellation Will Top $90 Billion During The Covid-19 Pandemic,” “Democrats Propose To Forgive Student Loans With 4 Changes,” and “Will Student Loan Forgiveness Ever Happen?” have flooded the media bringing hope to many federal loan borrowers across the nation. The government has been working on resolving student loan borrowers’ struggle by providing aid to them, particularly during the pandemic--a time of hefty financial burdens since much of the U.S. population has been out of work. But what is the reality of the situation? What changes will actually be made? 

What has already happened? One aspect of the CARES Act––the act that includes the $2.2 trillion dollar stimulus package in response to the coronavirus pandemic--is temporary student loan forgiveness. The government has paused federal student loan repayments while setting interest rates to 0% until September 30th, 2021. This means that you do not have to make any payments on your student loans during this time, and you will not have any added interest or be charged a late fee for doing so. By September 30th, over $90 billion dollars of student loan interest nationwide will have been forgiven.

Further, the Biden administration is reversing some decisions from previous presidential administrations that made it more difficult for some students to get their loans canceled. The borrower defense to repayment law was designed to protect students from school fraud or closure. Betsy DeVos, Secretary of Education during the Trump administration, tightened the standard for cancellation and shifted much of the burden of proof to the students. Current Secretary of Education Miguel Cardona has instead fully canceled approximately $1 billion of loans held by 72,000 borrowers whose universities misled them somehow. Further, Secretary Cardona waived an Obama-era rule that required totally and permanently disabled people to document their incomes over a period of three years. In doing so, the Biden Administration canceled over $1.3 dollars in student loans for students who have total and permanent disabilities. 

There are currently some other things that the Biden Administration is considering but has not yet acted on. First, President Biden has publicly supported canceling--outright--up to $10,000 in student loan debt per borrower. In addition, the administration is considering changing the rules governing income-driven repayment plans. If you made less than $25,000 per year, you would not owe any payments on your student loans, nor would you accrue interest. If you made more than $25,000, your payments would be limited to 5% discretionary income (after taxes and essential spending). After 20 years, any remaining balance would be forgiven. The Biden Administration would also make enrollment in this plan automatic. Finally, the administration supports $50,000 of loan forgiveness after five years of public service. The current program requires ten years of service but forgives any remaining balance after that time.

Currently, for most borrowers, the changes manifested only in the form of not being charged interest during the pandemic. Small portions of the population have had loans completely forgiven, but for the moment, most people are still looking at a total loan balance that remains unchanged.