Overview
On Wednesday, Aug. 24, President Biden announced a three-part plan to provide student loan debt relief to tens of millions of Americans. The student loan debt relief plan includes the following components: (1) a final extension of the student loan repayment pause to end on Dec. 31, 2022; (2) up to $20,000 in student debt cancellation for Pell Grant recipients and up to $10,000 for non-Pell Grant recipients earning less than $125,000 per year (or $250,000 for joint filers); and (3) a rule to create a new income-driven repayment plan that will reduce future monthly payments for lower- and middle-income borrowers, allowing for monthly payments on undergraduate loans to be limited to 5% of monthly income.
The White House estimates that the plan will provide student loan debt relief to up to 43 million borrowers, including full cancellation of remaining loan balances for about 20 million borrowers, and will cost the federal government about $240 billion over the next decade. An estimated 27 million Pell Grant recipients, who account for more than 60% of borrowers, will be eligible to receive the $20,000 in student loan debt relief. While the annual income limit is set at $125,000 for individuals and $250,000 for households, the Department of Education (“the Department”) estimates that nearly 90% of relief funds will go to borrowers with an annual income of less than $75,000.
The Department will launch an application process for borrowers to claim relief, which the White House said will be ready in early October. Bharat Ramamurti, deputy director for the White House National Economic Council, advised borrowers to apply by roughly Nov. 15, 2022, in order to receive relief before the payment pause expires on Dec. 31, 2022. He added that borrowers will receive relief within four to six weeks of submitting their application. While application details and income verification remain unclear, a self-attestation process is anticipated, whereby applicants would certify that their income qualifies, which could pose challenges for the government to verify the information. Borrowers are, however, encouraged to review their recent tax returns to confirm that their 2020 or 2021 adjusted gross income (AGI) falls below the required threshold, as AGI from either tax year may qualify. Nearly 8 million borrowers may be eligible to automatically receive relief due to their relevant income data already being available to the Department. The Department has to utilize the application process for the rest of borrowers since it does not collect income data for many individuals with federally backed student loans.
Additionally, borrowers who have worked in public service (federal, state, local, tribal government or a nonprofit organization) for 10 years or more, including non-consecutively, may be eligible to have all of their student loans forgiven through time-limited changes to the Public Service Loan Forgiveness (PSLF) program. Borrowers who are eligible for the PSLF program must apply before the time-limited changes end on Oct. 31, 2022.
Political Response
Critics of the student debt relief plan, including Democrats from both the moderate and progressive wings, said it does not do enough, is unfair or will worsen inflationary pressures. While many Democratic members praised the plan as essential relief for low- and middle-income Americans, some said it does not address the root problems of college affordability, lamenting that it does not expand Pell Grants more broadly to lower-income students and urged the president to do more.
During a call with President Biden last Tuesday evening, Senate Majority Leader Chuck Schumer (D-NY) made a final plea for President Biden to forgive as much student loan debt as possible. The call followed a meeting with White House officials and Senate Majority Leader Schumer, and Sens. Elizabeth Warren (D-MA) and Raphael Warnock (D-GA), members who previously pushed for forgiveness of upwards of $50,000 in student loan debt.
Republican members are broadly opposed to the plan. The Republican National Committee released a statement describing the plan as “Biden’s bailout for the wealthy.” Republicans argue that the plan is unfair to those who already paid off their student loans and taxpayers who did not attend college. Many economists also criticized the plan, saying debt cancellation could add to inflationary pressures in the long term and warning that it could cause future spending cuts or tax increases. Other economists argue that debt forgiveness is unlike the relief checks distributed throughout the pandemic, which some blame for adding to inflationary pressures. Since the relief will span over many years and borrowers will not receive the forgiven amount in cash for immediate spending, these economists believe that student debt loan forgiveness will do little to impact inflation. While President Biden himself was at first hesitant to use executive authority for student loan debt forgiveness, senior aides and advisors argued that the plan would be popular among young voters and would help minority and low-income borrowers.
Outlook
Because President Biden used executive action to forgive student debt, as opposed to Congress making changes through legislative action, legal challenges are expected. While there are still questions around who could demonstrate standing in a case against the plan, experts contend that a case could be heard if someone were to show that the measures cost them financially. Others suggest that loan servicers and those that fall just outside the income restrictions may also be able to sue. Additionally, if Republican members take control of the House in the upcoming midterm elections, Republicans could file a lawsuit against the plan, similar to the 2014 legal challenge the House Republicans mounted against the Affordable Care Act (ACA). In anticipation of such challenges, last Wednesday, the Department of Justice released a legal opinion saying the Higher Education Relief Opportunities for Students (HEROES) Act of 2003 grants the secretary of education authority to effectuate a program for loan cancellation during a national emergency. Former President Donald Trump declared a national emergency in March 2020, and it remains in effect today.
