President Joe Biden announced Wednesday that his administration will cancel $10,000 in student loan debt for federal borrowers and $20,000 for Pell Grant recipients earning less than $125,000 a year. 

The long-anticipated announcement comes one week before the pandemic pause on student loan payments is scheduled to end. Biden is extending that pause through the end of the year, which will help all borrowers, not just those eligible for the debt forgiveness, but the administration is warning this is the final extension and borrowers should plan to resume payments in January.

The debt forgiveness is capped at $20,000 for Pell Grant recipients and $10,000 for the other 40 percent of federal borrowers. To qualify, individuals must have earned less than $125,000 and households less than $250,000 in either the 2020 or 2021 tax years, according to senior administration officials who described the details of the plan in a background call with reporters. 

The relief is estimated to benefit 43 million federal student loan borrowers, 20 million of whom will have their debt completely canceled, the officials said. Current college students are eligible for the relief, with dependents’ eligibility based on their parents’ income. 

One of the administration’s goals with the debt forgiveness is to help narrow the racial wealth gap. The typical Black borrower will see their loan balance cut in half, with one out of every four Black borrowers seeing their debt canceled in full, the officials said. 

“All this means people can start to finally crawl out from under that mountain of debt, to get on top of their rent and their utilities, to finally think about buying a home or starting a family or starting a business,” Biden said in remarks from the White House.

The Education Department issued a legal memo citing a 2003 law that grants the secretary broad authority to provide relief from student loan requirements during periods of war and national emergencies as justification for the administration’s executive action.

“In present circumstances, this authority could be used to effectuate a program of categorical debt cancellation directed at addressing the financial harms caused by the COVID-19 pandemic,” the memo said.

Although the debt relief will not help future borrowers, the administration also announced a plan to overhaul income-driven repayment plans that cap borrowers’ monthly payments based on their discretionary income.

The proposed rule, which will apply to both current and future borrowers, would cut the amount owed under income-driven repayment plans in half from 10 percent of discretionary income to 5 percent. It will also raise the amount of income that is considered non-discretionary to protect borrowers who fall under 225 percent of the federal poverty level — earnings roughly equivalent to a $15 per hour minimum wage — from having to make any payments. 

The proposed income-driven repayment rule would also allow borrowers with balances under $12,000 to achieve loan forgiveness in 10 years instead of 20. Unlike current income-driven plans, the forgiveness would cover unpaid interest.

Campaign pledge

Biden first expressed interest in canceling up $10,000 in student loan debt during his 2020 campaign, where he faced progressive primary opponents with broader debt relief plans. 

After Biden was inaugurated, groups of congressional Democrats called on the president to use his executive authority to pursue student loan debt relief. Senate Majority Leader Charles E. Schumer, Sen. Elizabeth Warren, D-N.Y., and others said he should cancel as much as $50,000 in debt. 

Schumer, Warren and Sen. Raphael Warnock, D-Ga., met with Biden at the White House in June to discuss the topic and made another push for broad debt relief in a Friday conversation with White House Chief of Staff Ron Klain and National Economic Council director Brian Deese.

In a Tuesday night phone call with Biden, Schumer made one final plea for the president to cancel as much student loan debt as possible, arguing it is morally and economically the right thing to do.

Schumer and Warren issued a joint statement Wednesday saying Biden “has taken a giant step forward in addressing the student debt crisis” that will improve borrowers’ economic security. 

“The positive impacts of this move will be felt by families across the country, particularly in minority communities, and is the single most effective action that the President can take on his own to help working families and the economy,” they said, while promising to continue working for more debt relief. 

Opposition 

Republicans quickly panned the debt relief plan as a move that will exacerbate inflation and benefit the wealthy. 

“President Biden’s inflation is crushing working families, and his answer is to give away even more government money to elites with higher salaries,” Senate Minority Leader Mitch McConnell said in a statement. “Democrats are literally using working Americans’ money to try to buy themselves some enthusiasm from their political base.”

The senior administration officials said ending the student loan payment pause in January will largely offset the inflationary impact of the debt relief and noted there are certain conditions and assumptions under which the combined moves could be neutral or even deflationary. 

The officials also noted that the top 5 percent of earners will not receive a single dollar of relief. But outside analysts say the benefits will still largely go to the highest earners. 

A Penn Wharton Budget Model analysis released Tuesday ahead of the official announcement confirmed the top 5 percent of earners won’t see any debt relief. But the model estimates between 69 and 73 percent of the debt forgiveness will go to households in the top 60 percent of the income distribution.

One-time debt forgiveness of $10,000 for borrowers earning less than $125,000 per year will cost $330 billion over the 10-year budget window, Penn Wharton’s model estimates. 

The Committee for a Responsible Federal Budget also issued an estimate ahead of Biden’s announcement that pegged the cost of canceling $10,000 in student loan debt for households earning less than $300,000 at roughly $230 billion. 

Extending the student loan payment pause through the end of the year would cost $20 billion, CRFB estimates. Combined with the debt forgiveness, that would wipe away most of the debt reduction from Democrats’ recently enacted climate, tax and health care law, the group said.

Since they came before the official announcement, the Penn Wharton and CRFB estimates did not factor in $20,000 in debt relief for Pell Grant recipients.

“This is going to be massively more expensive than the original plan,” CRFB senior policy director Marc Goldwein tweeted, noting the higher cost plan “will surely wipe away more than 10 years” of deficit reduction in the climate, tax and health law “and add significantly to inflation.”

Goldwein’s group later blasted out an updated cost range for the debt relief plan: $400 billion to $600 billion.

At least one Democrat cited cost as a reason to oppose Biden’s plan. Rep. Chris Pappas, D-N.H., whose reelection race Inside Elections with Nathan L. Gonzales rates Tilt Democratic, said Biden’s student loan announcement is “no way to make policy” given that it sidesteps lawmakers’ oversight and fiscal responsibilities.

“Any plan to address student debt should go through the legislative process, and it should be more targeted and paid for so it doesn’t add to the deficit,” Pappas said.

Sen. Michael Bennet, D-Colo., whose race Inside Elections rates Likely Democratic, also said the Biden administration should have further targeted the debt relief and proposed a way to pay for it.

Biden defended the cost during his remarks Wednesday, arguing “there’s plenty of deficit reduction to pay for the program.” He cited White House budget office projections released Tuesday showing an expected $1.7 trillion deficit decline for the fiscal year ending Sept. 30, as well as the new budget reconciliation law.