Forgive and “ForDebt”: A Student Loan Forgiveness Guide

Author: Meerashree Goel, Graphics: Acasia Giannakouros

The BRB Bottomline:

Applications for the Biden-Harris Administration’s heavily anticipated Student Loan Forgiveness Plan have recently opened. If you are interested in finding out who is eligible for this plan, how to claim debt relief, and how this scheme may impact the U.S. economy, continue reading…

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Understanding the Student Loan Forgiveness Plan

On August 24th, 2022, President Biden announced his Administration’s plan to forgive a significant portion of student loan debt for millions of Americans. He stated that the government would provide debt relief of up to $10,000 to individuals who earn less than $125,000 on an annual basis or, equivalently, have an annual household income of less than $250,000; recipients of the Pell Grant are eligible to have up to $20,000 of their student loan debt forgiven. Furthermore, the announcement included an extension of the already active student loan payment pause until December 31st, 2022.  

The Plan’s Objective

The Biden Administration’s loan forgiveness plan came as a response to the $1.7 trillion student loan debt crisis that burdens approximately 44 million Americans today. According to Biden, his plan allows for people to finally “climb out from under that mountain of debt” and “think about buying a home or starting a family or starting a business.” In theory, the increased disposable income would in turn stimulate the economy and help ease current economic pressures — or, as Biden put it simply, make it so that “the whole economy is better off.” Additionally, by focusing on low-income citizens and households, as well as providing as much as double the relief to Pell Grant recipients, this plan helps take a further step towards closing the racial wealth gap, as stated by Massachusetts Senator Elizabeth Warren. Warren reasons that because Black students are more likely to take out educational loans and, more specifically, are twice as likely to be recipients of the Pell Grant as compared to White students, the plan would be especially beneficial for Black households.

Who Can Claim Debt Relief, and How?

Eligibility

So the most important question remains: Who is eligible for loan forgiveness, and how would someone go about claiming it?

The first criterion for eligibility is income. Once again, only borrowers with an individual annual income of less than $125,000 or an annual household income of less than $250,000 are eligible for debt cancellation of up to $10,000. Moreover, borrowers who are also recipients of the Pell Grant in any capacity (including partial Pell Grants) are eligible for up to $20,000 in forgiveness. 

The second criterion for eligibility is the type of student loan. Most of the federal student loans held by the Department of Education — direct, subsidized, unsubsidized, undergraduate, graduate, parent PLUS, and any other loans that qualify for the federal student loan payment pause — qualify for consideration. However, most loans not provided by the federal government, such as Perkins Loans and most Federal Family Education Loans (FFEL), are ineligible unless the borrower has applied for a direct consolidation loan prior to September 29th, 2022. It is also important to note that, unfortunately, borrowers with private student loans do not qualify for debt cancellation.

As long as their loans were disbursed by June 30th, 2022, borrowers who meet the criteria above are eligible for debt relief even if they are still in school, did not complete their degrees, or have defaulted on their loans.

The Application

Borrowers can apply for debt forgiveness through this form offered by the Department of Education. The application is very simple, requiring applicants to fill in only basic information, including their name, date of birth, contact information, and Social Security number. The form generally does not require applicants to upload any documents to verify eligibility but simply requires them to attest to meeting the income criteria; the Federal Student Aid office will then use federal records to vet for eligibility. In certain instances, however, applicants may have to provide additional information, in which case they will be contacted by the Department of Education after their application form has been reviewed.

The application form is currently open, and borrowers have until the December 31st, 2022 deadline to apply. The White House advises applicants to submit their applications before November 15th in order to maximize their chances of receiving debt cancellation this year. For those unable to fill out the form online, the Department of Education has stated that they will release a physical form soon, which applicants will have until the end of 2023 to submit.

Forgiveness

Regardless of whether an applicant is eligible to receive $10,000 or $20,000 in cancellation, the amount of relief they will receive is capped at the amount of their outstanding debt. For instance, if an applicant is eligible for $20,000 of relief but only has $5,000 of outstanding debt, they can only receive a total of $5,000 in debt relief.

There is no specific date penciled in as to when eligible applicants will receive the debt relief, but it should arrive within approximately four to six weeks from the time the application has been submitted. 

Although this relief is a good start and will definitely ease the burden of debt on many Americans, the $10,000, or even $20,000 of forgiveness, does not seem to be a sufficient solution to the student loan debt crisis. In a recent survey, 64% of the 2,000 responses stated that debt relief of $10,000 would “improve their life significantly.” However, this positive effect would only be felt temporarily, if at all — $10,000 only relieves a fraction of the average American’s cumulative student debt, which evens out to just under $30,000 per college graduate. For a student encumbered in debt, a reduction of $10,000 only stands to be a marginal improvement to their situation. To address the student debt crisis in the long run, policymakers must focus on the root of the issue: the rising tuition costs, forcing students to take on more debt.

Economic and Political Implications

While this plan is a source of much-needed relief to the tens of millions of Americans drowning in student loan debt, the economic implications of this plan have been a topic of significant disagreement. 

It is still unclear what it will cost the government to subsidize this plan, but estimates start at around $300 billion and go even higher. Many critics of the plan — mostly members of the Republican Party, as well as some Democrats — argue that this plan places an unfair burden on taxpayers. Republican Senator Ben Sasse believes that the plan unfairly “forces blue-collar workers to subsidize white-collar graduate students.” Others have pointed out that the plan is also unfair to those who have already made sacrifices to pay off their loans. Another source of contention revolves around the possibility that these loan cancellations may exacerbate inflation in the country, a counterintuitive outcome while the Fed is actively tightening its monetary policy in an attempt to curb inflation. As a show of this resistance, conservative groups have filed multiple lawsuits against the Biden Administration. As per its original schedule, the Biden Administration should have already started canceling student loan debt by October 2022; however, due to a Republican-led request for an injunction prohibiting the continuation of this plan, a federal appeals court has temporarily blocked the student loan forgiveness plan. 

Despite the political backlash and uncertainty for the macroeconomy brought upon by their plan, the Biden Administration remains steadfast in its argument that it is a vital step for Americans in the ultimate goal of solving the student debt crisis. Moreover, they believe it to be an efficient and sustainable solution — they maintain that because of the high default rates for student loans, the actual cost of the debt forgiveness plan will be lower than the theoretical expectation; however, the specifics of that value have proven to be difficult to calculate. Furthermore, while some Americans remain fearful that the debt relief plan will increase consumer spending and thus inflation when there is little room to do so, Biden’s economic advisers have stated that consumer spending induced by loan forgiveness would be a “drop in the bucket” in the greater scope of the U.S. economy and therefore unlikely to cause any significant impact to inflation. Thus, in spite of the current lawsuits in motion against them, the Biden Administration has every intention to carry forth the plan and is continuing to encourage people to apply for student loan relief.

Conclusion

Although the United States government has in the past subsidized social programs aimed at helping the disadvantaged, this student loan forgiveness plan is unprecedented in that it seeks to mitigate consequences of a conscious, explicit decision. Thus, the Biden Administration is setting an important precedent for future Administrations to come with regard to implementing aggressive, forward-looking social policy. It will be important to pay close attention to the plan as it unfolds, because its success or failure — or, simply how it is received by the American people — can very well drive policy for many years to come. Since government expenditure as a proportion of GDP had been steadily decreasing in the U.S. up until the pandemic, this plan could also be interpreted as an effort to address that gap and perhaps signal a much-needed return to the previous trend of government intervention; Biden himself acknowledged that while the cost of attending college has skyrocketed over the years, federal support has not kept pace.

Considering the political and legal challenges currently being faced by the Biden Administration, there is a reasonable possibility this plan may be further stalled or even dismissed by the courts. However, by urging people to continue submitting applications and thus implying that the plan will ultimately overcome these hurdles, the White House has shown a strong indication that debt relief will indeed be provided. Considering the easy application process as well as the approaching deadline on December 31st, 2022, people interested in applying for debt relief should do so as soon as possible. 

While there is some uncertainty pertaining to the economic — and specifically, inflationary — ramifications of this plan, if passed, it is guaranteed to provide significant relief to millions of people who have been forced to make large sacrifices in order to obtain further education.

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Take-Home Points

• Applications for student loan debt relief are currently open; people interested can fill out this form. The deadline to apply is December 31st, 2022.
• Borrowers with an annual income of lesser than $125,000 or an annual household income of lesser than $250,000 are eligible for up to $10,000 in debt cancellation. Recipients of the Pell Grant are eligible for up to $20,000 in debt cancellation.
• Most federal loans are eligible for consideration, whereas private loans are not.
• An estimated $300 billion cost to the government and taxpayers has sparked political controversy between the Biden Administration and critics of the plan.
• Some economists are concerned about the inflationary nature of this plan, whereas others do not think debt forgiveness will be a significant contributor to inflation.
• A federal appeals court has currently put the plan on hold in response to lawsuits filed by opponents of the plan. The Biden Administration, however, seems optimistic about proceeding with the plan as they are encouraging borrowers to continue applying for debt relief.