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Feds to Forgive up to $20,000 in Student Loans

New plan would forgive some debts, lower payments for others

Close up of two college graduates with caps and gowns with the White House in soft focus  in the background.
AFP / Getty Images

The federal government will forgive up to $20,000 in student loans under a long-awaited policy the Biden administration announced Aug. 24. The move will help borrowers of all ages, including people 50 and over, who owe nearly 22 percent of all student loan debt.

Debt forgiveness will be limited to individuals with less than $125,000 in annual income and couples with less than $250,000 in income. Nearly 8 million borrowers may be eligible to receive relief automatically because the U.S. Department of Education (DOE) already has the income information it needs to determine eligibility.

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Students with Pell grants who meet the income limits will have up to $20,000 in federal student loans forgiven. Pell grants are for students with the greatest financial need. Students without Pell grants can have up to $10,000 in federal student loans forgiven.

Missouri, Arkansas, Kansas, Nebraska, South Carolina, and Iowa have filed a federal lawsuit arguing that President Biden doesn’t have the legal authority to forgive student loan debts. Partly in response to the lawsuit, the Biden administration announced Sept. 29 that privately held federal student loans must have been consolidated before September 29 to be eligible for the debt relief. The move could exclude about 770 million borrowers from student loan debt relief.

Payment date pushed back

The administration also pushed back the date when borrowers must start repaying their student loans from Aug. 31 to Dec. 31. The moratorium on federal student loan payments began in March 2020 because of the COVID-19 pandemic, and that relief has been extended several times. The DOE says that the latest extension will be the last, and that loan payments will resume in January.

Private loans have not been subject to the payment moratorium.

The median student loan payment — half are higher, half are lower — is $222 a month, according to the Federal Reserve. The average payment is $393. For retirees, still having student loan debt can be a particularly difficult problem. The average Social Security retirement benefit is $1,625 per month, and for 1 in 4 seniors, Social Security represents 90 percent of their income.

The DOE plans a new income-driven repayment plan that caps payments for undergraduate loans to 5 percent of a borrower’s discretionary income — that is, the money left over after necessities, such as taxes, everyday expenses and household bills. Loans will be forgiven for borrowers with original loan balances of $12,000 or less after 10 years of payments, instead of the current 20 years. 

In addition, the DOE is proposing to raise the amount of income that is considered nondiscretionary and protected from being included in repayment calculations. No borrower earning under 225 percent of the federal poverty level — $30,578, or the annual equivalent of a $15 hourly wage for a single borrower — will have to make a monthly payment, the department says.

The White House provided this example: “A typical single construction worker making $38,000 a year … would pay only $31 a month, compared to the $147 they pay now under the most recent income-driven repayment plan, for annual savings of nearly $1,400.”

If the payment the borrower is expected to make based on the payment plan is not enough to cover the loan’s interest, the government will cover it. No borrower’s loan balance will grow as long as they make their monthly payments — ending a common problem for many borrowers, especially minorities. For example, 20 years after first enrolling in school, the typical Black borrower who started college in the 1995-96 school year still owed 95 percent of their original student debt, the White House says.

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Those who work for certain nonprofit organizations, the military, or federal, state, tribal or local government may be eligible to have all of their federal student loans forgiven after 10 years through the Public Service Loan Forgiveness program. Eligibility requirements for the program were temporarily eased; those who would like to apply should do so before Nov. 1.  

A growing problem for those 50 and older

People may think of student loans as a problem only for younger borrowers, but in 2020, those 50 and older with loans owed $33.6 billion of the $1.6 trillion in student loans outstanding — more than a fivefold increase from 2004. In 1989, 3.1 percent of families headed by someone age 50-plus carried student loan debt, owing an average of $10,073. By 2016, 9.6 percent of families headed by someone age 50-plus carried student loan debt, with the average amount owed more than tripling to $33,053.

Many older Americans took out student loans because they wanted to get more education that could lead to a promotion or higher pay. Others decided to go back to school so they could change careers, particularly after suffering a layoff. And still others are on the hook for loans that paid for their children’s education, either from Parent PLUS loans — federal money borrowed by parents — or as cosigners for debt from private lenders. About 25 percent of borrowers age 50 or older make loan payments on private student loans because their student family member failed to do so.

According to the White House, about 16 percent of borrowers are in default — including nearly a third of senior citizens with student debt. Student loans, unlike most other forms of debt, generally cannot be forgiven in bankruptcy.