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Financial Services Law Insights and Observations

Biden announces student debt cancellation

Federal Issues Department of Education Student Lending Biden Agency Rule-Making & Guidance Income-Driven Repayment Debt Cancellation Consumer Finance

Federal Issues

On August 24, President Biden announced a three-part plan for student loan relief. According to the Fact Sheet, the cumulative federal student loan debt is around $1.6 trillion and rising for more than 45 million borrowers. The President announced that the Department of Education (DOE) will, among other things: (i) provide up to $20,000 in debt cancellation to Pell Grant recipients with loans held by the DOE; (ii) provide up to $10,000 in debt cancellation to non-Pell Grant recipients for borrowers making less than $125,000 a year or less than $250,000 for married couples; (iii) propose a new income-driven repayment plan and cap monthly payments for undergraduate loans at 5 percent of a borrower’s discretionary income; and (iv) “propos[e] a rule that borrowers who have worked at a nonprofit, in the military, or in federal, state, tribal, or local government, receive appropriate credit toward loan forgiveness.” For income-driven repayment, Biden announced that the DOE is proposing a rule to, among other things: (i) reduce to 5 percent from 10 percent the amount that borrowers have to pay each month for undergraduate loans; (ii) guarantee that borrowers making less than 225 percent of the federal minimum wage are not required to make payments on their federal undergraduate loans; (iii) forgive loan balances after 10 years of payments, instead of 20 years, for borrowers with original loan balances of $12,000 or less; and (iv) cover the borrower’s unpaid monthly interest so that no borrower’s loan balance will grow when making monthly payments, “even when that monthly payment is $0 because their income is low.” The Fact Sheet also noted that if all borrowers claim the relief to which they are entitled under this plan, these actions “will [p]rovide relief to up to 43 million borrowers, including cancelling the full remaining balance for roughly 20 million borrowers,” will benefit primarily low- and -middle income borrowers, assist borrowers of all ages, and help narrow the racial wealth gap and promote equity by targeting those with the highest economic need.

The same day, the DOE announced a final extension of the pause on student loan repayment, interest, and collections through December 31. As previously covered by InfoBytes, in April, Biden extended the moratorium on collecting student loans through August 31, about which the DOE stated will allow “all borrowers with the paused loans to receive a ‘fresh start’ on repayment by eliminating the impact of delinquency and default and allowing them to reenter repayment in good standing.”

Earlier this week, the DOE announced that it will provide over $10 billion in debt relief for over 175,000 borrowers in 10 months through the Public Service Loan Forgiveness (PSLF) program. The recent announcement follows changes the DOE announced in October 2021 (covered by InfoBytes here) that, among other things, gave qualifying borrowers a time-limited PSLF waiver that allowed all payments to count towards PSLF regardless of loan program or payment plan. These include payments made on loans under the Federal Family Education Loan (FFEL) Program or Perkins Loan Program. The recently announced changes provide that student borrowers receive credit for payments made on loans from FFEL, Perkins Loan Program, and other federal student loans. To qualify for the program under the temporary changes, such borrowers must apply to consolidate their loans into a Direct Consolidation Loan by October 31. Additionally, the DOE announced that “under the temporary changes, past periods of repayment count whether or not borrowers were on a qualifying repayment plan or whether or not borrowers made payments.” To date, $32 billion in student loan relief has been approved for over 1.6 million borrowers.