What is the Student Debt Relief Plan?
As you may have heard, Prez Joe Biden has just announced the new Student Debt Relief Plan that will involve canceling up to $10k in federal student loans for millions of Americans.
But it isn’t a magic wand that’s going to cancel debt for everyone. This plan comes with 3 policies that will affect everyone differently based on your circumstances.
Let’s break it down:
✨ Part 1 ✨ All loan repayments paused until December 2022
Since President Joe came into office, student loans have been paused a number of times. The Student Debt Relief Plan is going to initiate one final pause on these payments until December 1, 2022.
Repaying your student loans remains a problem for 2023 you. Nice.
✨ Part 2 ✨ Debt cancelling for qualified borrowers
The juicy part. The plan involves canceling $10k of student loans for borrowers. This is targeted at working-class and middle-class families.
So you qualify if your individual income is less than $125,000, or you’re part of a household making less than $250,000.
If you received a Pell Grant, you might be eligible for having up to $20,000 canceled.
(A Pell Grant is is a type of federal financial aid that is need-based and often times does not need to be paid back.)
PSA: the phrase “up to” that’s getting thrown around a lot means that it’s capped at how much you have left to pay.
Ex: if you did get a Pell Grant, and you only have $14k left to pay in student loans, you’ll just get $14k in forgiveness.
On top of this, if you’re employed by a non-profit, the military, or federal, state, Tribal, or local government, you might be eligible for having your student loans forgiven through the Public Service Loan Forgiveness (PSLF) program.
This is a temporary program though and expires on October 31, 2022. So sign up as soon as possible. Head to the PSLF website to find out more.
✨ Part 3 ✨ Reducing future payments
Of course, a lot of people have more than $10k in student loans - the average is $39k. The plan also proposes a new rule to make future repayments more manageable.
✨ Under this plan you won’t have to pay more than 5% of your income on monthly loan repayments. Currently, its 10% under the income-driven repayment plan.
✨ The amount of income that is protected from loan repayments is being raised. So for example, if you make less than a $15 minimum wage, you’ll be protected from any repayment at all.
✨ For borrowers with balances of $12k or less, loans will be forgiven after 10 years (instead of 20).
✨ The plan will cover borrowers’ monthly interest, so no borrower’s loan balance will grow as long as they make their monthly payments. Same goes for if you’re not making any payments because your income is so low.
What do you need to do?
The debt repayment pause will happen automatically. So sit tight.
For loan relief, many borrowers will be eligible automatically because the Department of Education already has their data.
If the U.S. Department of Education doesn't have your income data - or if you don't know if the U.S. Department of Education has your income data, the Administration will launch a simple application in the coming weeks. This application will be open until December 31st.
If you do want to do something right now, you can sign up to be notified when this application is open on the Department of Education subscription page.
One very important deadline though
As we already mentioned, if you’re employed by a non-profit, the military, or federal, state, Tribal, or local government, the deadline for applying for complete loan forgiveness is Halloween, October 31 2022.
To find out if you’re eligible and apply, head to the PSLF website.
Why student debt relief is important
We have a whole article that goes into more detail on how the student debt crisis came about, and why debt relief is important.
But here’s some basic stats.
🔴 The average student loan debt is $39k.
🔴 About one-third of borrowers have student debt but no degree. (The main reason for dropping out? Financial strain.)
🔴 The student debt crisis affects Black people disproportionately.
The last point is what we want to briefly focus on here.
Because of hundreds of years of racism and discriminatory systems, Black students are more likely to borrow federal student loans and at higher amounts than other Americans.
Which means four years after earning a bachelor's degrees, they owe nearly $25,000 more than their white peers on average, Brookings Institution study.
So attempts to ease the student debt crisis are a step towards tackling racial disparities.
What does student debt relief mean for your personal finances?
As we mentioned, the average student debt in America is $39k.
This plan offers $10k in relief.
This is a step in the right direction, freeing up a chunk of money that people can redirect towards other debt repayments, savings, or just living more comfortably.
But people are still gonna have a lot of money to pay back.
So it’s still a good idea to chat to a financial planner, make a plan, and smash your student debt.
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