Biden's Long-awaited Announcement on Student Debt Forgiveness: Does it Solve the Ongoing Crisis?

A supervisor once told me that when you offer an opinion, no matter how informed, always make it into a sandwich. He said to cover any criticism with positivity, in the beginning and at the end – the bread. So here is my sandwich for the Biden administration’s student loan forgiveness announcement.

First, President Biden must be commended for offering some income-contingent student loan relief of $10,000 and for offering additional relief - another $10,000 – for those who received a Pell Grant anytime during their undergraduate or graduate studies. The President not only fulfilled a campaign promise by offering student loan forgiveness but, in doing so, may have wiped out student debt completely for about 20 million borrowers. He should also be applauded for resisting the temptation of going too far as members of the progressive wing of his party were demanding.

I am most happy for the millions of student loan borrowers who have been waiting for clarity about forgiveness and the status of the payment pause. They have been stuck in limbo too long and deserve to move on with their lives. Finally, they know how much student debt they still must contend with and can formulate a strategy to pay off their remaining student loans. This will also allow financial professionals who specialize in assisting student loan borrowers in offering concrete plans to manage the student debt burden.

Now let us dig into this sandwich. It seems clear that the timing of the announcement is politically inspired as is another extension of the student loan payment pause that will now run until the end of 2022. Why keep 45 million borrowers waiting for forgiveness when the Administration knew for months that they had the power to forgive student debt without congressional approval? I suppose nothing motivates action than an upcoming mid-term election.

One of the adjustments that the Administration is proposing for income-based repayment plans seems promising on the surface, but student loan borrowers need to be careful in how they utilize it. The Administration is reducing the income-based repayment cap to 5% from 10% of discretionary income and raising the floor of discretionary income to 225% of the poverty rate equivalent to about $15 per hour for a single borrower. They are further proposing that the federal government pay any interest that is more than the borrower’s income-based repayment.

This is a step in the right direction but for many borrowers it will not reduce the underlying balance on their student loans because they will just be paying interest during the income-based repayment period. Even if the student loan balance is forgiven after 10 or 20 years, it will be considered taxable income. For example, a borrower that averages an income of $50,000 during the income-based repayment period could pay $25,000 over 10 years or $50,000 over 20 years without a reduction in their balance. At the end, the balance may be forgiven but they will still owe taxes on the amount forgiven.

Prior to entering such plans, borrowers should do careful analysis looking at the short- and long-term consequences of income-based repayment plans. For many, a better option will be to consider refinancing their student loans with an income sharing payment plan that has no underlying debt. Full disclosure, I am the Founder & CEO of Defynance and we offer such a solution. I encourage student loan holders to evaluate how our solution is better for them today and in the long-term.

Another potential issue with the announcement is that many borrowers are going to have to fill out an application, not to be available for weeks, before they know if forgiveness applies to them (sign up here to find out when the application will be available). If it took almost 2 years for the Administration to announce forgiveness, why isn’t the application ready today? As is typically the case with government announcements, the immediate positive high is typically followed by faulty execution and resulting service failures. Today is not the day to be negative so I hope that I am proven wrong.

Before I top off this sandwich by commending the President once more, I have to state that neither the Administration nor Congress has done anything about the underlying problem of why student debt has grown 7-fold over the past couple of decades. The reality is that the federal government has created a system, which misaligns incentives for student loan servicers who rarely offer the right advice to student loan borrowers. Moreover, the government has also made student loans available freely without any measures to hold colleges and universities accountable for exploding tuition costs. If these and other underlying problems are not addressed, the amount of outstanding student debt will be back to its current levels – before $10,000 forgiveness – in just 4 years.

In closing, I also appreciate that the Biden Administration has already forgiven $32 billion in student loans mostly for borrowers who were defrauded by for-profit colleges (click to see the list) and for those who are permanently disabled (click to see if you qualify). They have at least attempted to address the most severe student loan problems while reaching a decision on broad forgiveness.

With the long-awaited August 24th announcement, the Administration has most certainly taken a step in the right direction but in no way have they leaped to the destination when we no longer consider student debt to be a crisis. But it must be acknowledged that we are, without question, a little bit closer.