How Biden’s Student Loan Forgiveness Helps You (Or Not)

President Joe Biden’s long-awaited decision on student loan forgiveness has finally been made—and his plan will clear the debts of millions of borrowers, but have a minimal impact for others. 

If you have a federally held student loan, $10,000 of it will be forgiven as long as you make less than $125,000. If you received a Pell grant for students from lower income families, you’ll be eligible for $20,000 instead. On top of that, the student loan pause that’s halted interest and required payments since the pandemic hit has been extended from its Aug. 31 expiration date to Dec. 31.

The issue of student debt relief has been an open question since the 2020 presidential campaign, when Biden promised at least $10,000 of relief per borrower. Since then, student borrowers, advocates, and progressive politicians have urged Biden to go farther and either wipe out $50,000 per borrower or cancel it completely, using his executive authority to bypass the lawmaking process, while some critics have said any forgiveness would be unfair to those who never went to college. 

Millions Likely to Have Debt Wiped Out Completely

The average amount owed on student loans was $36,245 in 2021 according to a recent report from the Federal Reserve Bank of New York. But there was big variation within that group.

The additional money for Pell Grant recipients, plus the income restrictions on the aid mean that lower-income borrowers will benefit the most—  27 million Pell Grant recipients will be eligible for $20,000 in relief, and 20 million of those will have their loans fully canceled, Biden said in a speech Wednesday.

Cassie Baca, 25, of Pasadena, California, is among those who will see their finances dramatically improved by $10,000 of forgiveness. She graduated in 2019 with a little over $20,000 in debt for her economics degree, and began working as a manager of business development for a company in the sports industry. The $300-a-month monthly payments took a significant bite out of her entry-level salary, and when payments were suspended in 2020, she found herself with room in her budget to put money towards savings and retirement. 

$10,000 of forgiveness means extra motivation to pay off the remaining balance, she said. 

Like Pouring a Cup of Coffee on a Forest Fire

For the most heavily indebted borrowers, $10,000 won’t make much of a difference. About 3 million, or 7% of all borrowers, have balances more than $100,000, including 800,000 with balances of $200,000 or more, according to the Federal Reserve Bank of New York. 

Lauren Schreiber, a chiropractor in Troy, Illinois, said that amount barely puts a dent in the $40,000 in interest that builds up each year on her $580,000 student loan debt. Schreiber said she wasn’t able to buy a house because of her debt-to-income ratio, and had to move back in with her parents. She even lived in her SUV at one point to keep her costs of living down.

“Full forgiveness seems to be the best/ only option due to the predatory nature of the loans and the havoc they have had on recent graduates,” Schreiber said in a social media message. 

Monica Heierman Brady, 50, a grant writer in Detroit, said she owes $200,000 for her master’s degree, library science degree, and professional certifications. On top of that, her daughter, husband, and son combined owe another $300,000. Quoting a co-worker, she compared $10,000 against this debt load to “pouring a cup of coffee on a forest fire.” 

“It would have zero effect on anyone in my family,” Brady said. 

The student loans have weighed heavily on Brady’s financial life. She’s currently putting off $15,000 worth of repairs her air conditioner needs, and is worried she’ll be unable to replace her aging cars when they break down. She and her husband had to drain their retirement savings after her husband, a welfare eligibility specialist, lost his job a few years ago. While they’ve since gotten back on their feet career-wise, the loans still cast a long shadow that won’t be dispelled by Biden’s forgiveness plan.

President Biden’s administration also proposed a new plan for federal student loan repayment for undergraduate loans. The plan would cap monthly payments at 5% of your monthly income. After 10 years, whatever remaining balance you have would be eliminated if the original loan balance was $12,000 or less.

Younger Borrowers Benefit Most

Under a $10,000 forgiveness policy, (but not accounting for the extra money for Pell grant recipients), younger borrowers benefit most. About 60% of the money from forgiveness would go to people under 40 under such a policy, the New York Fed estimated. 

Student Loan Forgiveness and Inequality

Most of the money is going to lower and middle-income borrowers—90% of eligible borrowers have household incomes under $75,000, Biden said.

Different analyses have found different racial patterns in who would gain the most from $10,000 of forgiveness. Black and White borrowers would benefit approximately equally, with Hispanic borrowers receiving less, the Wharton and University of Chicago researchers found.

However, a study by researchers at Arizona State University and the University of Iowa found that Latinx and White borrowers would benefit slightly more than Black and Hispanic ones under $10,000 forgiveness, while greater forgiveness amounts would skew more in favor of Black borrowers and serve to narrow the racial wealth gap.

The Cost of Student Debt and Canceling It

Aside from the issue of how the loans would affect inequality, critics say it’s fundamentally unfair for people who attended college to receive the benefit of loan forgiveness, while those who were unable to go to college get nothing. The program would cost $300 billion researchers at Wharton said in a report Wednesday, but that calculation did not include the extra money for Pell grant recipients.

Advocates of loan forgiveness contend that students starting in their teen years have been pressured to take on debt as a necessary requirement to launch their careers. At the same time, government funding for college has been cut in recent decades, leaving students with ever greater debt burdens. From their point of view, debt forgiveness is not a handout, but long overdue support for education.

“I feel super fortunate to have been able to go and get my education,” Baca said. “But it definitely almost feels like a punishment after graduating. I kind of look at my diplomas like, that's an expensive piece of paper.”

Have a question, comment, or story to share? You can reach Diccon at dhyatt@thebalance.com.

Note: This article has been updated with details from President Biden's speech on Aug. 24, 2022.