More than 40 million Americans could see their student loan debt reduced — and in many cases eliminated — under the long-awaited forgiveness plan President Joe Biden announced Wednesday, a historic but politically divisive move in the run-up to the midterm elections.
Fulfilling a campaign promise, Biden is erasing $10,000 in federal student loan debt for those with incomes below $125,000 a year, or households that earn less than $250,000. He’s canceling an additional $10,000 for those who received federal Pell Grants to attend college.
It’s seen as an unprecedented attempt to stem the tide of America’s rapidly rising student debt, but it doesn’t address the broader issue — the high cost of college.
Biden also extended a pause on federal student loan payments for what he called the “final time.” The pause is now set to run through the end of the year, with repayments to restart in January.
“Both of these targeted actions are for families who need it the most: working and middle class people hit especially hard during the pandemic,” Biden said at the White House Wednesday afternoon.
The cancellation applies to federal student loans used to attend undergraduate and graduate school, along with Parent Plus loans. Current college students qualify if their loans were issued before July 1. For dependent students, their parents’ household income must be below $250,000.
Who qualifies for student loan forgiveness?
Students will qualify to have up to $10,000 forgiven if their loan is held by the Department of Education and they make less than $125,000 individually or $250,000 for a family.
If they received Pell grants, which are reserved for undergraduates with the most significant financial need, they can have up to $20,000 forgiven. If they are a current borrower and a dependent student, they will be eligible for relief based on their parents’ income, rather than their own.
Roughly 27 million recipients of Pell grants will now be eligible for loan forgiveness.
What is a Pell Grant?
Created by the Higher Education Act in 1965 as a way to promote access to education, federal Pell grants are special scholarships reserved for undergraduates and certain other students with the most significant financial need.
The grants generally don't need to be paid back, but they often don't cover the full cost of college — so recipients take out additional loans.
The Biden administration is targeting Pell grant recipients for additional forgiveness “to smooth the transition back to repayment and help borrowers at highest risk of delinquencies or default once payments resume,” according to the US Department of Education.
Republicans quickly denounced the plan as an insult to Americans who have repaid their debt and to those who didn’t attend college. Critics across the political spectrum also questioned whether Biden has authority for the move, and legal challenges are virtually certain.
Republicans and some moderate Democrats have said debt cancellation will add to inflation by giving Americans more money to spend. And others say that blanket debt forgiveness is unfair to those who have already paid off students loans.
House minority leader Kevin McCarthy, a Republican from California, quickly criticised the plan on Twitter: "Who will have to pay for Biden's debt transfer scam? Hard-working Americans who already paid off their debts or never took on student loan debt in the first place," he wrote.
Will this impact already high inflation?
Despite fears that Biden's student debt relief will fuel already-crippling inflation, economists say the combined impact will be minimal on the economy at large.
"The end of the moratorium will weigh on growth and inflation, while the debt forgiveness will support growth and inflation," Moody's Analytics chief economist Mark Zandi told CNN. "The net of these cross-currents is largely a wash."
Moody's estimates that the combined impact will reduce real GDP in 2023 by 0.05 percentage points, drive down unemployment by 0.02 percentage points and cut inflation by 0.03 percentage points.
(with inputs from agencies)