Biden’s Student Debt Relief Plan: How Does it Work, and Who’s Eligible for Debt Forgiveness?

One American out of every five owes money on student loans. That adds up to about $1.75 trillion in student debt, and is about $320 billion more than Americans owe on their cars. On August 24, President Joe Biden said the federal government was going to do something about all that student debt—pay it. At least a significant portion of it.

Leading up to the 2020 presidential election, Biden campaigned on a promise to forgive student debt, though what he announced doesn’t quite live up to his pledge. In his campaign, Biden said he proposed to “forgive all undergraduate tuition-related federal student debt from two- and four-year public colleges and universities for debt-holders earning up to $125,000, with appropriate phase-outs to avoid a cliff.”

Biden’s announcement yesterday said that the federal government would now cover $10,000 in outstanding student debt for borrowers whose personal incomes are $125,000 or less—$250,000 for a married couple). For borrowers who also received Pell Grants—a type of federal financial aid for low-income students—the amount that could be paid off doubles to $20,000.

Few states will benefit more from Biden’s student debt relief program than California. Residents of the state with the largest population also hold more student debt than Americans in any other state—$141.8 billion according to the Education Data Initiative. Borrowers in California also carry the 13th-highest average student debt load of those in any state or U.S. territory—$37,084.

So the average Californian with an unpaid or partially paid student loan can expect to have almost one-third of that debt, and possibly nearly two-thirds, simply wiped out. 

How Does Biden’s Student Debt Relief Plan Work?

The exact details of Biden's loan forgiveness plan are still somewhat unclear. The U.S. Department of Education, which will administer the program, says that it plans to have "a simple application process for borrowers to claim relief” ready by the end of 2022. 

That’s also when a current freeze on student loan payments will expire. In March of 2020, at the start of the COVID-19 pandemic, the Trump administration allowed borrowers to “pause” their monthly payments for a short period. As the pandemic and the economic crisis that it caused dragged on,  the deadline for restarting those payments was extended six times. But it was scheduled to end on Aug. 31, 2022. As part of the debt relief program he announced this week, Biden extended the moratorium for what he called “one final time,” through Dec. 31. Borrowers will be required to start paying again in January. Whether the application process will be ready in time for the forgiveness program to prevent those payments from kicking in is not yet certain. Some borrowers will receive their forgiveness automatically, however.

Borrowers who owe more than the $10,000 or $20,000 and are eligible for forgiveness will need to keep making regular payments until the remaining balance of their debt is eliminated. According to statistics reported by the Washington Post, more than half of all borrowers, 53 percent, owe less than $20,000—but those 53 percent hold only 13 percent of all outstanding student debt.

How Do I Know if I’ll Get $10K, or $20K?

Only Pell Grant recipients are eligible for the full $20,000 of student debt forgiveness under the Biden plan. Though the Pell Grant program is designed for low-income students, and as the name suggests, it involves grants not loans, there are no specific parameters for qualification. Individual colleges evaluate Pell Grant applicants on a case-by-case basis. 

Most of the grants go to students who need them the most, however, according to statistics posted by the White House and compiled by the Department of Education. Only seven percent of all Pell Grants went to students from families with household incomes of more than $60,000 per year, according to those stats, which cover the years 2019 and 2020. Two of every three (66 percent) were awarded to students whose families earned no more than $30,000. 

Numbers put together by the Education Data Initiative (EDI) go back to 2009, and show that 34 percent of all undergraduate students (not just borrowers) received Pell Grants, with the average amount received being $4,491 of a maximum $6,495. The EDI also found that 51 percent of the grants went to students whose families earned less than $20,000 per year.

The Fine Print in Biden’s Plan

In a statement accompanying the White House announcement on Aug. 24, the Department said that about 8 million borrowers will be eligible for automatic forgiveness because their income data is already accessible. Others whose data is not on file must go through the as-yet undetermined “simple application” process. 

All but about 10 million of the approximately 48 million borrowers with outstanding student debt received “Direct Loans.” Those are loans that come straight  from the federal government, through the DoE. All Direct Loans are eligible for forgiveness. Non-direct loans are subsidized by the federal government but taken out through a private bank. Most non-direct loans were taken prior to 2010, as were those given through the since-expired Perkins Loan program.

The DoE said that those loans will also be eligible for forgiveness, though whether they would be covered through the same application as Direct Loans was not immediately clear.

Under Biden’s plan, the amount of forgiveness is capped at the total of a borrower’s remaining debt. In other words, a borrower who is eligible for $20,000 of forgiveness, but owes only $8,000, would have only the $8,000 in payments covered.

Other Debt Relief Announced by President

Under a new rule that will be part of the debt relief program, new student borrowers will no longer be required to make student loan payments of more than 5 percent of their “discretionary income” each month. 

Previously, monthly payments were capped at 10 percent of discretionary income—meaning money left over after paying taxes and covering essential living expenses such as rent and food. For the government’s purposes, discretionary income has been considered any earnings over 150 percent of the federal poverty line (based on household size). 

Biden’s plan also narrows the definition of “discretionary income,” meaning more of a borrower’s income would be excluded from the formula used to calculate monthly payments. Though the Aug. 24 announcement did not specify what types of income would now be considered “non-discretionary,” Biden said that under the new program, no one earning less than 225 percent of the federal poverty line—which is roughly equivalent to the income of a single full-time worker earning $15 per hour—will be required to make a monthly payment.

The new program would also forgive, after 10 years, all debt for borrowers who took out original loans of $12,000 or less. Previously, borrowers were required to pay for 20 years before they were considered debt free.