What you need to know about Biden’s plan to cancel student loan debts

More than two years after his pledge to cancel $10,000 in federal student loan debts per borrower, President Joe Biden has rolled out his plan to eliminate debts for millions of borrowers.

On 24 August, the president announced a sweeping proposal to curb the growing debt crisis, which has ballooned to nearly $2 trillion, most of which is wrapped up in federal loans.

Roughly 43 million federal student loan borrowers will be eligible for relief under the president’s plan, including 20 million people who are eligible to have their debts canceled completely, according to the White House.

The vast majority of relief through the administration’s latest measure will benefit borrowers with annual incomes of less than $75,000.

The president also is extending a pandemic-era freeze on repayments, with interest rates set at zero per cent, until 31 December. That moratorium was set to expire on 1 September.

Here is what borrowers can expect under the president’s cancellation plans.

Borrowers who took out federal student loans to pay for their college education and who make less than $125,000 a year – or $250,000, if filing jointly – are eligible for up to $10,000 in debt cancellation.

Pell Grant recipients under the same income threshold will be eligible to have up to $20,000 in their federal student loan debts canceled.

Borrowers who are employed by nonprofit organisations or federal, state and local governments or enrolled in the military may also be eligible to have their student loan balance canceled through the Public Service Loan Forgiveness programme.

That programme cancels the remaining balance on a federal student loan after 120 payments while working full time in those roles.

Nearly 8 million borrowers may be eligible to receive automatic debt relief, if their income data is already on file with the US Department of Education. Otherwise, the administration will open up an application process in the coming weeks.

That application will be available before the end of the repayment moratorium, which expires on 31 December.

Eligible borrowers must have taken out a federal loan no later than 30 June, 2022.

A new rule under President Biden’s proposal would cut the amount of discretionary income used to calculate payments made as part of income-driven repayment plans from 10 per cent of discretionary monthly income to 5 per cent.

“For example, a typical single construction worker making $38,000 a year with a construction management credential would pay only $31 a month, compared to the $147 they pay now under the most recent income driven repayment plan that would give them an annual savings of nearly $1,400,” a senior administration official told reporters on 24 August.

Borrowers will be allowed to permit the Education Department to automatically access their income tax information so they will not have to adjust their income each year.

Federal loan balances also will be forgiven after 10 years of payments, instead of 20, for borrowers with balances of $12,000 or less.

The plan also would cover unpaid monthly interest, so that “no borrower’s loan balance will grow as long as they make their monthly payments – even when that monthly payment is $0 because their income is low,” according to an outline of the plan.

Mr Biden’s announcement comes more than two years after his initial campaign-trail promise to cancel $10,000 in debt per borrower.

Meanwhile, progressive lawmakers and debt relief advocates – who have organised for years on the issue and pressured the White House into action – continue to demand that the administration cancel all debts and reject means-testing barriers in broad relief measures.

Advocates have argued that the president’s $10,000 limit and a proposed income cap for relief could prevent millions of other borrowers from debt cancellation, which the president could do with the stroke of a pen on broader executive order.

“While this announcement is a major win for many, it is important to stress that $10,000 will leave many others still crushed by debt and important details will determine who has access to much-needed relief,” according to Natalia Abrams, president of the Student Debt Crisis Center. “

In November 2020, the president called on Congress to “immediately” provide some relief for millions of borrowers saddled by growing debt.

“[Student debt is] holding people up,” he said at the time. “They’re in real trouble. They’re having to make choices between paying their student loan and paying the rent.”

More than 40 million Americans hold roughly $1.9 trillion in student loan debt, most of which is wrapped up in federal loans. The average balance is $37,667, according to the Education Data Initiative. That debt soars to tens of thousands dollars more among advanced degree holders.

Since March 2020, with congressional passage of the CARES Act, most borrowers have not had to make monthly payments on their student loan debt, with interest rates set at zero per cent. That pause has been extended seven times, including four times by President Biden, most recently in April.

The amount of debt taken out to support student loans for higher education costs has exploded within the last decade, while tuition costs have surged, private university enrollment grew, wages stagnated and governments stripped investments in higher education and aid, putting the burden of college costs on students and their families.

Borrowers also have been trapped by predatory lending schemes and sky-high interest rates that have made it impossible for many borrowers to make any progress toward paying off their debt, with interest adding to balances that exceed the original loan. For many borrowers, that $10,000 in relief may only cover the cost of a year’s worth of interest.

The debut burden also falls disproportionately on Black borrowers, who owe an average of $25,000 more in student loan debt than white college graduates, according to the Education Data Initiative.

Four years after graduation, 48 per cent of Black students owe an average of 12.5 per cent more than they borrowed, the organisation found.

Black student loan borrowers are also the most likely to struggle financially due because of that debt burden, with 29 per cent making monthly payments of $350 or more.

The student loan burden is also heavily gendered – women hold roughly two-thirds of all student debt.