Today, President Joe Biden took historic action to address federal student loan debt. While many more details are expected in the coming weeks, the plan provides $20,000 in student debt relief for recipients of Pell Grants—a federal grant program for undergraduate students with the most financial need—and $10,000 for those who didn’t receive Pell Grants. This debt cancellation will only apply to single borrowers earning less than $125,000—or $250,000 for couples—and will be automatic for as many as 8 million borrowers. Furthermore, the student loan payment pause is extended one final time through December 31, 2022.
The Center for American Progress has previously called on the Biden administration to cancel at least $10,000 and urged the president to minimize administrative burden by using available data across the federal government to make the cancellation happen automatically for borrowers where possible. This is a bold step for the higher education system—and one that will benefit a wide cross-section of people and communities throughout the country.
Here are three of the most important things to know about this long-anticipated action:
1. Debt cancellation will help millions of student loan borrowers
Approximately 43 million Americans today hold more than $1.6 trillion in federal student loan debt. The debt burden experienced by these borrowers is the result of a perfect storm of rising college costs, state disinvestment, and insufficient federal financial assistance. For example, 73 percent of all Pell Grant recipients also took out loans, showing that available grant aid is not keeping up with college costs. These borrowers come from various age groups, political affiliations, and walks of life. As a result, some have had to make tough choices between paying down their student debt and paying for rent, health care, child care, and other basic necessities. With President Biden canceling a substantial amount of student loan debt, millions of borrowers will have their balances reduced or completely wiped out.
- As a result of this executive action, up to 43 million borrowers will receive relief, including 20 million borrowers having their remaining balances canceled in full.
- According to the administration, approximately 27 million borrowers may be eligible to receive up to $20,000 in debt cancellation.
- The administration estimates that approximately 8 million borrowers may receive automatic relief.
- Approximately 90 percent of this relief is going to borrowers earning less than $75,000, and high-earning individuals in the top 5 percent will not benefit from this action.
- Among those receiving relief, 21 percent are borrowers 25 years of age and younger; 44 percent are borrowers ages 26 to 39; and more than one-third are borrowers who are 40-years-old and older.
2. Debt cancellation will help narrow the racial wealth gap
Black students and their families are more likely to need to borrow, borrow more, and take longer to pay off their loans. In addition, Black undergraduates are far more likely than any other racial group to qualify for Pell Grants, which demonstrates their unique financial need. For these reasons, President Biden’s debt cancellation action is a significant first step in narrowing the racial wealth gap.
- Pell Grant recipients are students with financial need and are more likely to be students of color:
- Of white full-time, first-time undergraduate students, 34 percent got Pell Grants
- Of Black full-time, first-time undergraduate students, 71.8 percent got Pell Grants
- Of Hispanic full-time, first-time undergraduate students, 59.8 percent got Pell Grants
- Sixty-six percent of Black borrowers owe more than they originally borrowed after 12 years, compared with only 30 percent of white borrowers. These disparities are exacerbated by the predatory behavior of expensive for-profit institutions that intentionally target Black and Latino communities.
- The average white family has roughly 10 times the amount of wealth as the average Black family.
- Nearly 50 percent of all Black borrowers have defaulted on their loans.
- Four years after graduation, the average white student loan borrower owes $28,006, while the average Black student loan borrower owes $52,726.
3. Debt cancellation is just one piece of the president’s announcement to tackle student debt
In addition to historic debt relief for borrowers, the president also announced key reforms to the higher education system that will make repaying student loans easier for borrowers. Through changes to income-driven repayment (IDR) and Public Service Loan Forgiveness (PSLF), the administration is helping to restore the promise of higher education as a pathway to economic opportunity, instead of insurmountable debt.
- Through a new IDR plan, monthly student loan payments will be capped at 5 percent of a borrower’s discretionary income, lowering the average annual student loan payment by $1,000 for borrowers with undergraduate loans.
- The new IDR plan would also provide debt cancellation after 10 years—instead of 20 years or 25 years under current options—and protect more income from being considered discretionary.
- The announcement also highlights new changes to the PSLF program that will improve the application process and ensure more payments count towards relief.
- These new changes build upon the temporary relief provided through the U.S. Department of Education’s PSLF waiver, which has already provided more than $10 billion in cancellation for more than 175,000 individuals in public service.
This historic announcement from Biden on debt cancellation is only one piece in addressing the student debt crisis. At the heart of the debt cancellation movement is the recognition that no one should have to take on debilitating debt to gain access to college and all of its economic and social benefits. This move by the Biden administration cannot, by itself, prevent current and future students from suffering just as much or more under the weight of student debt. As CAP recently detailed, Congress and the Biden administration must seize this moment of extraordinary attention to the student debt crisis by making lasting reforms.
The authors would like to thank Bradley D. Custer and Ella Azoulay for their contributions to this article.