Biden announces ‘landmark’ student loan forgiveness plan

United States President Joe Biden has announced his long-awaited plan to deal with the student debt crisis, with loan-forgiveness for millions of borrowers and a cap on the rate of pay.

Total student debt has risen to US$1.6 trillion and has become a critical issue because almost all of it is held by the US federal government and 16% of the more than 43 million borrowers are in default.

The centre pieces of the plan announced on 23 August are forgiveness of US$10,000 for people earning less than US$125,000 (US$250,000 for married couples) and up to US$20,000 for former Pell Grant recipients, the nation’s poorest students.

Additionally, Biden proposes that Congress cap monthly payments at 5% of the borrower’s discretionary income – half of the rate most borrowers presently pay.

“President Biden’s decision to cancel student loan debt for millions of borrowers is the right move at the right time, particularly after the pandemic-related financial and health struggles so many Americans have faced,” says Ted Mitchell, president of the American Council on Education (ACE), the major coordinating body for the nation’s colleges and universities, based in Washington DC.

“We particularly applaud the focus on low-income borrowers. But to avoid forcing current and future students into the same debt morass, we must act in a comprehensive manner to modernise the federal student loan programme,” he says, noting that in addition to federal agencies (under Biden’s control), Congress, state legislatures, as well as colleges and universities will have to work together.

The student debt crisis has many causes. Most visible is the fact that since 1980 the cost of higher education has more than tripled, even after taking into account the inflation rate.

A major contributing factor to this rise is that state governments have cut back their support of public colleges and universities; since 1990, for example, in Pennsylvania, the state has gone from paying 70% of its public universities’ costs to the students paying 70%.

This sharp increase in tuition and fees has hit Pell Grant eligible students the hardest because federally issued Pell Grants, which are targeted at economically disadvantaged students and have recently been increased to US$6,500 per year, have not kept pace with college and university costs, resulting in these students taking out more loans and for greater amounts of money.

A further contributing factor is the interest rate the federal government charges for student loans, given that it holds almost the entire US$1.6 trillion of student debt.

Until the recent rises in the prime interest rate, the US government has been able to borrow at near 0.5% but has been charging people who borrowed 3.73% for their undergraduate education and 5.28% for their graduate education. As interest rates rise, the same spread will remain, though, because of how compounding of interest works, the amounts owed will be proportionately greater.

Supporting middle-class borrowers

This skyrocketing debt, “is a significant burden on America’s middle class,” says the statement issued by the White House that detailed the president’s plans. “Middle-class borrowers struggle with high monthly mortgage payments and ballooning balances that make it harder for them to build wealth, like buying homes, putting money away for retirement, and starting businesses.”

Biden’s announcement came after months of debate within the administration and with Democratic leaders in Congress, and a week before the pause on debt repayments necessitated by the dislocation to the economy by the COVID-19 pandemic – first instituted by former president Donald Trump and renewed by Biden – was set to expire.

To allow the US Department of Education to put in place the necessary systems and Congress time to pass the necessary legislation, Biden has extended the pause to the end of December.

Though Biden did not cancel the first US$50,000 of every student’s debt, as New York Senator and Senate Majority Leader Chuck Schumer and Massachusetts Senator Elizabeth Warren had called for, they issued a joint statement of support.

“With the flick of a pen, President Biden has taken a giant step forward in addressing the student debt crisis by cancelling significant amounts of student debt for millions of borrowers. 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.”

According to the White House, nearly one-third of student loan borrowers (14,191,000 people) were unable to complete their education because of the cost of their student debt – meaning they left higher education with debt but no diploma. Some 16% of borrowers (7.2 million people) are in default; one-third of these are senior citizens.

Black borrowers disproportionately affected

Further, the White House said, the student debt burden falls disproportionately on black borrowers, a larger percentage of whom borrow a greater percentage of the funds they need to pay for higher education. “Twenty years after first enrolling in school, the typical black borrower who started college in 1995-96 still owed 95% of their original student debt.”

The reasons for this are many, including lower salaries earned after graduation as well as the fact that black students typically have significantly less family capital to draw on to finance higher education.

“Black folks,” says Dr Ali R Bustamante, deputy director of the New York-based Roosevelt Institute’s Worker Power and Economic Security Program, “have a disproportionate [economic] constraint when accessing higher education. And that’s why we see the trends in terms of black students borrowing considerably more than their white counterparts. They are more than twice as likely to borrow.”

Black student loan borrowers owe an average of US$52,000, says Dr Richelle Brooks, who is a school principal in California and founder of ReThink It, a non-profit organisation that fights systemic racism in education; she freely speaks of the fact that despite her good job, she has trouble making her student loan payments.

“They are the poorest student loan debtors and the most penalised by high interest rates because of their greater proportion of debt.”

Critics say plan fuels inflation

Two minutes before senators Schumer and Warren tweeted their support at 11.59am, Republican Senator Chuck Grassley (Iowa) gave the president’s plan a thumbs down. “Ppl making up to $125,000 or a couple making up to $250,000 are getting student loans paid for by everyone else who didn’t go to college or paid their loans. Will fuel further inflation hurting those who can least afford it. UNFAIR.”

(While Grassley is correct that some people earning US$125,000 will receive debt relief, the income band that ends at US$125,000 begins at US$75,000, and accounts for only 13% of the total number of people that will benefit from the plans announced today. Eighty-seven percent of those who received student debt relief earn less than US$75,000 per year.)

Senate Minority Leader Republican Mitch McConnell picked up on several themes, including the American bogey-man of “socialism” he had used last April when he denounced any move to help people burdened by student debt.

“President Biden’s student loan socialism is a slap in the face to every family who sacrificed to save for college, every graduate who paid their debt, and every American who chose a certain career path or volunteered to serve in our Armed Forces in order to avoid taking on debt.”

Utah Republican Senator Mitt Romney’s tweet accused the president of pandering before the November mid-term elections: “Sad to see what’s being done to bribe the voters. Biden’s student loan forgiveness plan may win [the] Democrats some votes, but it fuels inflation, foots taxpayers with other people’s financial obligations, is unfair to those who paid their own way and creates irresponsible expectations.”

‘Acknowledgement of past mistakes’

Bustamante rejects the Republican critique that Biden’s effort to deal with the student debt crisis is unfair to those who have paid back their debts or never incurred them in the first place.

“I think that’s a really poor way of framing the question of debt cancellation. In many ways, debt cancellation is an acknowledgement of past policy mistakes. It was wrong for the government to shift the burden of financing higher education institutions onto students and their families. So, student debt cancellation is a really critical part of correcting that mistake.

“We should acknowledge that going to university is a public good that we all benefit from.”

When I asked Brooks about the Republicans’ criticism, she began by saying: “The Republicans didn’t have any trouble coming up with trillion-dollar tax cuts for the banks and big business. We’re continually finding the budget for the military and the police. The fact that we can come up with the funds for things the Republicans deem necessary but can’t come up with the funds for public goods such as education is astronomically ridiculous.

“The one-percenters aren’t paying their fair share of taxes. It’s the lower and middle class that are fronting the load of taxes. So, it's doubling down. We’re paying our taxes and we deserve free higher education.”

Biden too referenced the tax cut the Republicans voted for in the first year of president Donald Trump’s term, saying pungently: “I will never apologise for helping working Americans and the middle class – especially not to the same folks who voted for a US$2 trillion tax cut that mainly benefited the wealthiest Americans and the biggest corporations, that slowed the economy and didn’t do a hell of a lot for economic growth, and wasn’t paid for and racked up this enormous deficit.”

Move to income-based repayment

Bustamante was especially complimentary about the move to Income Based Repayment. “I don’t think anyone saw this coming, the additional targeted reforms that will help people now and help prevent this crisis from bubbling up in the future,” he says.

At present, monthly loan repayments are calculated on 10% of the borrower’s discretionary income. Under the new rules the Department of Education is proposing, that figure is 5%. The poorest borrowers, such as a single person earning US$31,155, will not have to make any payment.

Recognising that one of the drivers of growing debt was the fact that interest accrued even as payments were made, the Department of Education is changing the rule: “No borrower’s loan balance will grow as long as they make their monthly payments – even when that monthly payment is US$0 because their income was too low,” says the statement issued by the White House.

Further, for borrowers with an original loan balance of US$12,000, the Department of Education will forgive loans after 10 years of repayment instead of the current 20 years. This reform will affect mainly community college graduates and is expected to make almost all of them debt free within a decade.

In addition to simplifying what can only be described as a Byzantine system – the Department of Education has 16 different loan repayment plans and several different forbearance plans – the White House says that these reforms will save typical borrowers between almost US$1,400 and US$2,800 per year.

A single public school teacher earning US$44,000 per year presently pays US$197 per month to service their student debt; that amount will drop to US$56 per month. A nurse who is married with two children and earns US$77,000 per year, will see their repayment bill drop to US$61 per month from US$295.

An additional important legislative support for borrowers who will be helped by Biden’s plan is already in place. A provision included in the American Rescue Plan for businesses, which came into effect in March 2021, allows that the new student debt relief will not be counted as taxable income for federal income tax purposes.

Congressional action is needed for double the Pell Grant to around US$13,000 and to make community college tuition free.

‘Landmark for equity’

The United Negro College Fund (UNCF) has called Biden’s plan “landmark”. For its senior vice president of public policy and government affairs, Lodriguez V Murray, the plan hit home. “The Biden-Harris White House is applying balm to the misery. I was a Pell Grant recipient when I went to Morehouse College. I know the struggles of hustling together the resources and how real debt accumulation is to a first-generation college or high school graduate.

“For me, and the UNCF, this is not just policy in a vacuum, this is real. There are those who say a rising tide lifts all boats, but especially after the reckoning that began in the summer of 2020 [after the killing of George Floyd], we know more emphasis must be applied to those who are in most need. The administration is using their executive power to provide a level of equity that is nothing short of praiseworthy.”

Both Bustamante and Brooks told University World News that while they support the president’s plan, it was only a first step.

Bustamante says that to address the historic wrongs caused by the shift away from states paying the lion’s share of public colleges’ and universities’ expenses requires re-creating a real public and affordable option for higher education. This will also, he says, help lower the tuition increases in the private higher education sector.

Brooks closed her remarks by saying: “This proves that Joe Biden has the full power to cancel student loan debt. And we’re going to keep fighting.”