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White House Announced Up to $20,000 in Student Debt Forgiveness, Helping Low-Income Students Nationwide

  • The cost of college tuition has tripled since 1980, but federal support has not kept pace, resulting in millions of hardworking Americans being saddled with insurmountable debt. 


  • Biden’s loan forgiveness program will help lower and middle income Americans overcome that debt and improve the nation’s overall economic outlook. 


  • Loan forgiveness will not worsen inflation because reduced buying power from restarting interest payments will offset the boost from loan forgiveness.

The Need for Student Loan Forgiveness

On August 24, the Biden administration announced a plan to cancel student loan debt of up to $20,000 for middle and low income students.


The announcement comes at a time when obtaining a college degree in the United States is more expensive than ever. The price of four-year college has almost tripled since 1980, while federal support has not kept pace. 


Pell Grants, which are awarded to students solely based on financial need, have been the main source of financial assistance for low and moderate income families to attend college in the United States since the program was started in 1972.


Research has shown that Pell Grants have boosted college enrollment, reduced drop-out rates, and improved student outcomes by allowing more students the opportunity to afford college and reducing the need to work while attending school. 


However, Pell Grants now cover a much smaller share of costs than before. Today, they cover only around 29% of student fees, compared to nearly 80% in 1975 due to increases in the cost of attending college. Thus, many college students must take out loans in addition in order to afford their degree, which leave the typical undergraduate student with nearly $25,000 of debt post-graduation. 


The Biden administration’s plan will help alleviate debt that harms so many Americans across the nation. Forgiving debt will ensure greater economic opportunities for tens of millions of Americans. Notably, it will help those who have historically had fewer opportunities, especially Black borrowers who owe double the amount of debt compared to white borrowers, and women, who hold roughly two-thirds of student loan debt. 

According to Penn Wharton budget model analysis, 75% of the student loan forgiveness plan will go to households making $88,000 or less, helping those most in need.

What Does the Plan Entail?

An announcement made by the office of Federal Student Aid details three main parts to the plan:


1. Final extension of the student loan repayment pause

The Biden Administration has extended the student loan repayment pause for federally held loans that took effect on March 13, 2020, under the Trump Administration due to the ongoing COVID-19 pandemic. This final extension will be in effect through December 31, 2022, with payments resuming in January 2023. The pause was extended three times during the Trump Administration, and now a total of four times by President Biden.


2. Providing targeted debt relief to low and middle income families

Under the plan, the U.S. Department of Education will provide up to $20,000 in debt cancellation to federal Pell Grant recipients with loans held by the Department of Education, and up to $10,000 for non-Pell Grant recipients. 


To be eligible for student loan forgiveness, an individual’s income must be less than $125,000 or $250,000 for households. 


Borrowers employed by nonprofits, the military, or federal, state, Tribal, or local government may be eligible have have their student loans forgiven through the Public Service Loan Forgiveness (PSLF) program until October 31, 2022. 


3. Make the student loan system more manageable for current and future borrowers

The Biden Administration has also proposed a new rule to create a new income-driven repayment plan to reduce future payments for lower and middle income buyers.

Positive Economic Effects of Forgiving Student Debt

Analysis conducted in 2018 found that canceling all outstanding student debt at the time, which was around $1.4 trillion, would boost gross domestic product by an average of up to $108 billion a year for the following decade. While Biden’s plan does not cancel quite as much debt, it can still be expected that there will be positive economic growth in the long run due to it. 


Outstanding student loans have negative financial impacts on borrowers, thus lowering overall home ownership, borrower net worth, and small business formation. Alleviating federal student loan debt is expected to positively impact and reduce such issues, leading to beneficial economic activity and growth.

What About Inflation?

One major argument against the plan is that it will increase inflation, stemming from the belief that reducing or eliminating loan payments will allow consumers to spend more. However, many experts believe that this is not the case.


The plan will restart interest payments on student loans that have been paused since March 2020. White House economists, researchers at Goldman Sachs, and more, argue that the reduced buying power from restarting interest payments will offset the boost from loan forgiveness, and thus not increase inflation.

Is it Legal?

Critics of the plan have challenged the plan’s legality and are expected to sue the administration over the plan. However, similar debt relief in the past has set a precedent that could cause trouble for those against the plan.


The Biden administration relied on the 2003 Heroes Act when creating the plan, which was enacted following the September 11 attacks. The Heroes Act, passed in the aftermath of September 11 with wars in Iraq and Afghanistan in mind, gives the Education secretary the authority to waive debt obligations amid a war or national emergency. The administration believes that the COVID-19 pandemic falls under the law, as it was declared a national emergency, and thus they have strong legal ground for the action. 


Several lawsuits have been brought by opponents of the program and the application for forgiveness is temporarily suspended while the courts weigh in. The Biden administration has expressed confidence in the legality of student loan forgiveness and that the program will resume.

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