President Joe Biden delivered a win-win for student loan borrowers.
The president on Wednesday announced an executive order to forgive $10,000 in student loan debt for individuals who make $125,000 or less and for households that earn $250,000 or less, according to a tweet from the president’s official account. An additional $10,000 in forgiveness goes to those who received federal Pell grants.
Biden also extended the pandemic forbearance on federal student loans to December 31, helping those who didn’t make the forgiveness cut or who would still have an outstanding balance after forgiveness. The administration also laid out other steps to reduce the education cost burden for existing and future borrowers.
The latest move delivers on Biden’s campaign promise for student debt relief and could help up to 43 million borrowers, according to the administration.
An erasure of $10,000 for all borrowers with federally-backed loans would cost roughly $371 billion and eliminate loans for about a third of borrowers. While the $125,000 income cap reduces the cost and scope, 90% of the relief goes to households with $75,000 in yearly income or less, according to figures from the Department of Education.
“No individual making more than $125,000 or household making more than $250,000 – the top 5% of incomes in the United States – will receive relief,” the fact sheet provided by the administration stated.
With $10,000 in forgiveness, “you’re going to reach a lot more borrowers that are at significant risk of default,” Antoinette Flores, director of postsecondary education at the Center for American Progress (CAP), told Yahoo Finance. “We know that the majority of borrowers who ended up defaulting have debt below $10,000.”
On the campaign trail, Biden backed student loan forgiveness of $10,000. But after winning the election, then President-elect Biden described canceling student debt through executive power as “pretty questionable.”
“Debtors did this through years of organizing, borrowers and their allies pushed a reluctant administration to deliver broad based student debt cancellation,” Astra Taylor, co-founder of the Debt Collective, said in a statement.
The extension of the payment pause will provide temporary relief for the rest of borrowers who are ineligible for forgiveness or who will receive limited relief from the elimination of $10,000 of debt. The relief originally was set to expire on August 31.
“In keeping with my campaign promise, my Administration is announcing a plan to give working and middle class families breathing room as they prepare to resume federal student loan payments in January 2023,” the president tweeted.
The pause is the final extension after originally enacted by former President Donald Trump at the beginning of the pandemic in March 2020 to help borrowers who were facing financial troubles such as job loss or furloughs.
It has been extended seven times collectively by both administrations, and some experts said it was necessary to extend forbearance again this time around as borrowers and servicers were not ready to begin repayment.
The Education Department is also proposing a rule to cap monthly payments for undergraduate loans at 5% of a borrower’s discretionary income, which is half the rate borrowers pay now under most plans. That will reduce the average annual student loan payment will be lowered by more than $1,000 for both existing and future borrowers, according to the administration.
The department will also propose forgiving loan balances after 10 years of payments, instead of 20 years, for borrowers who had original loan balances of $12,000 or less, which would especially help borrowers who attended community college.
Another move will be to fix the trouble-plagued Public Service Loan Forgiveness (PSLF) program that provides student debt forgiveness for borrowers after working at least 10 years in public service jobs with federal, state, local, or certain non-profit organizations.
Editor’s note: This story is developing.
Ronda is a personal finance senior reporter for Yahoo Money and attorney with experience in law, insurance, education, and government.
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