President Joe Biden’s efforts to cancel student debt for eligible borrowers would be welcomed relief and life-changing for many U.S. adults and families. Canceling this debt would be of particular benefit to households of color. However, for people who have never gone to college or have already paid off their loans, the impact would be minimal, and the economic impact may not be as positive as some think.
Key Takeaways
- In 2022, the Biden-Harris administration announced a three-part student debt relief plan, which would have forgiven up to $10,000 in federal student loans for those making less than $125,000 (or $250,000 for married couples) annually.
- Borrowers who received Pell Grants would have been eligible for up to $20,000 in forgiveness.
- Federal student loan payments were paused during the pandemic but resumed in the fall of 2023.
- After the U.S. Supreme Court invalidated his original plan to forgive student loan debt, President Biden implemented the Saving on a Valuable Education (SAVE) plan as an alternative.
- Although the SAVE plan became available to student loan borrowers in August 2023, the plan was blocked by a federal court on July 18, 2024, pending litigation.
What Is Biden’s Plan to Cancel Student Debt?
On Aug. 24, 2022, the Biden-Harris administration announced its long-term student debt relief plan, but it was overruled by the U.S. Supreme Court in June 2023. The plan featured three prongs:
- Borrowers earning less than $125,000 per year would have been eligible for $10,000 of federal student loan forgiveness. Married couples filing jointly or heads of household who make up to $250,000 still would have been eligible. Those who received the income-based Pell Grant while students would have been eligible for up to $20,000 in forgiveness.
- The pause on federal student loan payments would end on Sept. 1, 2023.
- Income-driven repayment (IDR) plans would have been capped at 5% of discretionary income rather than the current 10%.
The application process for student loan forbearance was briefly opened, but legal challenges prompted the U.S. Department of Education to stop accepting applications indefinitely and pause processing applications that already were submitted.
While the debt forgiveness plan was ultimately rejected by the Supreme Court, the administration continued to pursue alternative measures for debt relief through loan forgiveness and income-driven repayment (IDR) plans. The pause on student loan interest ultimately ended on Sept. 1, 2023, and payments resumed on Oct. 1, 2023.
Student loan forgiveness would apply to certain federal loans held by the Department of Education. Private loans are ineligible for forgiveness.
The Saving on a Valuable Education (SAVE) Plan
President Biden announced the Saving on a Valuable Education (SAVE) plan on June 30, 2023, which officially became available to student loan borrowers in August 2023.
The plan cuts payments on undergraduate loans in half, reduces some borrowers’ monthly loan payments to $0, ensures that balances don’t grow as long as payments are kept up to date, and provides early forgiveness for low-balance borrowers.
On July 18, 2024, a federal court blocked the operation of the SAVE plan until court cases centered around the IDR plan can be resolved. In the meantime, the Department of Education has moved borrowers enrolled in the SAVE plan into forbearance, whereby they will not need to make payments, nor will interest accrue on their loans.
Options exist for borrowers nearing Public Service Loan Forgiveness (PSLF). Borrowers can "buy back" months of PSLF credit if they reach 120 months of payments while in forbearance or switch to a different IDR plan.
Tax Implications of Canceling Student Debt
Note that while the American Rescue Plan makes student loan forgiveness granted from Jan. 1, 2021, to Dec. 31, 2025, tax-free at the federal level, some states may see it differently. Currently, forgiveness is expected to be taxed as income in Arkansas, California, Indiana, Minnesota, Mississippi, North Carolina, and Wisconsin.
Positive Impacts of Canceling Student Debt
Though plenty of borrowers owe more than $10,000, any sort of student loan forgiveness would benefit them financially. Some economists believe loan forgiveness also would stimulate the economy as borrowers could use that money for other purposes, such as buying a home.
For example, if you have $35,000 in student loan debt with a $300 monthly payment at a 4.66% interest rate, you’ll pay almost $12,000 in interest over the course of 13 years. By canceling $10,000 of that student debt, you could save about $6,000 and pay off the rest of your debt five years sooner.
Canceling student debt could be of particular benefit to lower-income borrowers, especially women and people of color. An academic paper in 2020 maintained that the “median wealth for Black households overall, not just borrowers, would instantly increase by 42% with $75,000 in student debt forgiveness and around 34% with $50,000 in forgiveness.” Those are higher amounts than President Biden has suggested but would be in keeping with his administration’s initiatives to address racial equity.
Refinancing your federal student loans into private student loans could mean losing eligibility for student loan forgiveness.
Negative Impacts of Canceling Student Debt
Critics argue against canceling any amount of student loan debt, in part because it would unduly benefit a relatively privileged class of people: college students. While more than 45 million Americans have at least some student loan debt, they represent only approximately 13.5% of the U.S. population.
In addition to concern regarding the fairness of the plan, it also is not without its costs. Fiscal experts estimate that loan cancellation would cost $519 billion over the course of a 10-year budget window. Add another $16 billion in forbearance for 2022 and potentially another $450 billion for the new IDR program, and the total sticker price could be near $1 trillion.
That potential trillion dollars in forgiveness has to come from somewhere. Current estimates state that forgiveness will cost roughly $2,500 per taxpayer, whether they went to college or not.
While forgiving student loans may have an impact on current borrowers, an analysis by the Committee for a Responsible Federal Budget said they would expect student loan debt to return to $1.6 trillion by 2028. Since the plan does nothing to dampen higher education costs, it has no impact on current and future students facing historically high education costs.
Student loan debt cancellation may have another negative impact: higher inflation rates. The Committee for a Responsible Federal Budget estimates that the influx of $10,000 to $20,000 for millions of borrowers could push inflation rates even higher, with personal consumption expenditure (PCE) inflation increasing by 15 to 27 basis points.
If federal student loan forgiveness does not go through and you are not able to get relief, then you may want to consider loan consolidation or student loan refinancing.
Do I Have to Have a Certain Type of Loan to Qualify for Forgiveness?
Yes. The student debt relief plan applies only to federal loans held by the U.S. Department of Education. Those loans include undergraduate and graduate direct loans, Federal Family Education Loans (FFELs) and Perkins Loans held by the Department of Education, and certain defaulted loans held by the Department of Education.
What Are Three Pros of Canceling Student Loan Debt?
Three of the major arguments in favor of broad student debt cancellation are:
- Student loan debt slows new business growth and limits consumer spending. Broad student loan debt forgiveness may help boost the national economy by making it more affordable for borrowers to participate in it.
- Due to a combination of family income, generational wealth, and other factors, student loan debt is disproportionately held by Black borrowers compared to their White counterparts. Canceling student debt could go a long way toward narrowing the racial wealth gap.
- High debt burdens have prevented an entire generation from achieving life milestones like getting married, purchasing a home, or even saving for retirement. Lessening the student debt burden would likely improve financial and personal well-being, credit, job stability and satisfaction, and even family stability for thousands of people; in addition to allowing more people to enjoy homeownership earlier in life, the capacity to build an emergency fund, human capital investments, and the accumulation of wealth.
Is Enrollment in the Saving on a Valuable Education (SAVE) Plan Automatic?
It depends. Borrowers already enrolled in the Revised Pay as You Earn (REPAYE) plan were automatically enrolled in the new Saving on a Valuable Education (SAVE) plan. Other borrowers had to submit an application to qualify.
However, on July 18, 2024, a federal court blocked the SAVE plan from operating until court cases regarding the income-driven repayment (IDR) plan can be resolved. The Department of Education has moved borrowers enrolled in the SAVE plan into forbearance, meaning borrowers will not need to make payments, nor will interest accrue on their loans.
The Bottom Line
Although there is a consensus that higher education reform, particularly regarding costs, is desirable, experts are divided on whether canceling some or all student loan debt is the best way to go about it. While those receiving forgiveness will see a financial benefit, there may be longer-reaching ramifications that will be more costly for all taxpayers in the long run.
