With student debt cleared of billions of dollars in books, millions today woke up to a different financial world. One where they have higher net worth, greater purchasing power, and better access to financial products, such as mortgages.
President Joe Biden’s announcement of collective student loan forgiveness will change the lives of 43 million borrowers — fully paying off 20 million debts.
“This will provide people with an opportunity to climb up the economic ladder that was not available to them yesterday,” says Mike Pearce, executive director of the Student Borrower Protection Center.
Pierce described the ad as historic.
“Cancellation of debts and liberating people from those burdens will open up all these avenues for them to lead a more complete and complete economic life,” he said.
But perhaps most important is the Biden administration’s proposal to restructure how loans are repaid, giving future borrowers much more leeway when it comes to paying down debt.
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It’s been a long time since forgiveness
President Joe Biden announced Wednesday that the Department of Education will forgive up to $20,000 in student loans for those who qualified for Pell grants and $10,000 for all other borrowers with less than $125,000. Pell Scholarships are awarded to students who have exceptional financial needs.
Biden also extended the moratorium on payments one last time until December 31, 2022 and proposed important changes that would make payments easier.
The announcement came as long as a pandemic-era payments freeze set to expire on August 31. Biden, who has pledged to cancel thousands of dollars in student debt for most borrowers during the election, promised an answer before September.
Biden had already taken smaller steps toward debt clearing. Last week, he announced student debt cancellation for those who attended ITT Tech, wiping $3.9 billion off records. This, however, goes much further than that.
Removing this will definitely wipe the page completely for the 15 million people who owe less than $10,000 in student loan debt,” says Angelique Palomar, associate director of communications at the Institute for College Access and Success.
And even those who won’t see their student debt eliminated will see payments drop dramatically.
“It’s important to realize that this isn’t just a shift for people who don’t have debts,” Pierce says. “Lots of other people will get real, meaningful, tangible and immediate financial relief, when the student loan system is up and running again.”
Another part of Wednesday’s announcement, which will likely have more impact than the cancellation, is how the Biden administration hopes to make your loan repayments more manageable in the future.
She is proposing an income-driven payment plan, which she says will significantly reduce monthly payments for people on low and middle incomes.
The proposed plan would require borrowers to pay no more than 5% of their “discretionary” income on college loans, as opposed to the current standard of 10%.
It will also increase the amount considered nondiscretionary income, so that if you earn less than 225% of the federal poverty line, you won’t get a monthly payment until your income increases that limit.
And if you owe less than $12,000, your balance will be forgiven after 10 years of payment instead of 20, among other proposals.
Exactly how this will work, what it will cost and who will benefit from it has yet to be announced.
“Obviously, we don’t have many details, and I think those details are going to be very important,” says Persis Yu, director of policy and administrative advisor at the Student Borrower Protection Center.
Student loans make up the second largest portion of household debt in the United States, after mortgages. The total is $1.6 trillion for 45 million borrowers. About 92% of that is federal student loans.
And while a one-time cancellation and potential small payments in the future is convenient, it can make some people think it’s likely to happen again.
“It generally doesn’t fix the problem, which is the massive increases in student borrowers,” says Philip Brown, professor of clinical finance at Northwestern University’s Kellogg School of Management.
Brown adds that government-owned student debt has risen more than 600% since the Great Recession.
“So this cannot continue. The US government has to find a way to not take on this heavy burden of student loans affecting their budgets over time.”
Tolerating $10,000 for each borrower making less than $125,000 will cost taxpayers $300 billion this year, according to Ben Wharton’s budget model. However, the form has not been updated since it was announced that several people will be exempted up to $20,000.
Forgiveness might encourage people to take on more debt, Brown says, or give institutions a reason to raise the cost of education.
“The government really has to make it harder for people to borrow, to get student loans…something has to be done,” Brown says. My recommendation is to make it more difficult for student borrowers to get money. This is the opposite.”
It will increase fears of inflation tolerance
Many have argued that forgiving student loan debt now will only increase inflationary pressures.
A recent CNBC poll showed that nearly 60% of Americans are concerned that student loan forgiveness will increase inflation problems.
Even Larry Summers pushed the president into being too intolerant, saying it would add to inflation pressures. Earlier this week, Summers, President Clinton’s former Treasury Secretary, tweeted that if there was a forgiveness, it should only be for “the first few thousand dollars in debt.”
“The worst idea would be to continue the current moratorium that benefits among others high-paid surgeons, lawyers and investment bankers.”
However, Brown does not think forgiveness will add to inflation significantly.
“The borrowers are not making their loan payments at the moment,” he said. “So for those who get a reduction or cancellation of their student loans, to some extent, it will be the way it is.”
And for those who didn’t get a full remission, they’ll start paying again in January.
“So they’re going to take money out of the economy, sort of to counter the possibility that those who get relief are going to spend more money.”
Planning your next steps
So where are you going from here? Information about the plan is still pouring in, but Palomar at the Institute for College Access and Success has some advice.
You’ll want to keep an open line of communication with your loan provider, she says.
“It’s a good idea for all borrowers, as quickly as possible, to check the status of their student loans,” Palomar says.
Confirm the payment plan you’re using and be sure to update your information as needed. You can do this by visiting studentaid.gov. There, you can make changes to your account, constantly update your information and adjust your payment schedule and plan.
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This article provides information only and should not be construed as advice. It is provided without warranty of any kind.