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Joe Biden

U.S. President Joe Biden speaks in the East Room of the White House in Washington, D.C. on July 8, 2021. (Photo: Saul Loeb/AFP via Getty Images)

Benefits of Biden's Student Debt Plan Don't Stop at $10K Cancellation

The changes to income-based repayment rules are "a really big deal," said an aide to Rep. Ilhan Omar. "I hope those of us who understand it still isn't enough can still celebrate what it'll mean for a lot of people."

Kenny Stancil

While disappointed that U.S. President Joe Biden declined to wipe out all $1.6 trillion in federal student loan debt held by more than 45 million borrowers, progressives welcomed other relief measures announced Wednesday.

Biden's move to cancel up to $10,000 in debt for federal borrowers with individual incomes under $125,000—and up to $20,000 for Pell Grant recipients—has received most of the attention.

But according to many observers, the president's modification of the income-driven repayment (IDR) program may end up having an even more significant positive impact on millions of Americans.

Under a new IDR plan proposed by the Department of Education (DOE), monthly payments for undergraduate loans will be capped at 5% of an individual's discretionary income—half of what one is required to pay under most existing plans—saving borrowers an average of more than $1,000 per year.

In addition, the DOE plans to increase the amount of income that is deemed nondiscretionary and thus protected from repayment. Such a change guarantees that "no borrower earning under 225% of the federal poverty level—about the annual equivalent of a $15 minimum wage for a single borrower—will have to make a monthly payment," according to a White House fact sheet.

Unlike existing IDR plans, the new plan will cover a borrower's unpaid interest, meaning that loan balances won't continue to balloon as long as monthly payments are being made—even if monthly payments are $0 based on a person's income.

Moreover, any remaining debt held by borrowers with original loan balances of $12,000 or less will be eliminated after 10 years of payments rather than 20, a reform that DOE predicts will allow almost all community college students to be debt-free within a decade. The remaining balances of most borrowers will be canceled following 20 years of payments.

These changes to income-based repayment rules are "a really big deal," tweeted Isaiah Baehr-Breen, an aide to Rep. Ilhan Omar (D-Minn.), one of the leading advocates for universal student debt cancellation. "I hope those of us who understand it still isn't enough can still celebrate what it'll mean for a lot of people."

Baehr-Breen's sentiments were echoed by others. The American Prospect managing editor Ryan Cooper argued on social media that Biden's proposed IDR plan—especially the DOE's redefinition of nondiscretionary income, which effectively abolishes payments for individuals making $30,578 or less per year—is "potentially a bigger deal than forgiveness."

Journalist Matthew Chapman, meanwhile, praised the DOE's decision to let borrowers off the hook for unpaid interest, the accrual of which has made student loan repayment particularly challenging and sometimes impossible.

As a result, Chapman explained, "no borrower on an IDR plan will have their balance go up," and "if they go the whole 20-25 years, they have a much lower remaining balance to forgive, which means the tax penalty for getting the remaining balance forgiven is much smaller."

Roughly 20 million borrowers could see their entire student loan balance erased as a result of Biden's move to cancel $10,000 to $20,000 in debt for all but the top 5%, according to the White House. Another 23 million borrowers are projected to benefit to a lesser degree.

Nearly eight million people may be eligible for automatic relief because the DOE already has the income data necessary to determine their eligibility. Thanks to the American Rescue Plan, canceled student debt won't be treated as taxable income for federal tax purposes through 2025.

"Congress ideally should extend the student loan forgiveness tax exemption in the American Rescue Plan," Chapman tweeted. "But even if that doesn't happen, Biden's plan considerably slashes any potential tax penalty" because those on the new IDR track won't be responsible for accrued interest and will therefore have lower outstanding balances.

To facilitate a "smooth transition back to repayment," the DOE is extending the student loan freeze one "final time" through December 31.

Biden's decision to cancel some student debt, progressives argued Wednesday, shows that he could cancel all of it.

Characterizing the president's limited plan as the outcome of years of organizing, Debt Collective press secretary Braxton Brewington declared, "This is truly just the beginning."

Although Biden acknowledged that university tuition has been skyrocketing for decades and vowed to take steps to make community college more affordable and to keep cracking down on predatory for-profit institutions, he stopped well short of calling for free public higher education, which would undermine the need for student loans.

"Every penny of student debt should be erased because college is a public good and it should be free," Debt Collective co-founder Astra Taylor said Wednesday morning.

Sen. Bernie Sanders (I-Vt.) echoed that call later in the day.

"The president's decision today to reduce the outrageous level of student debt in our country is an important step forward in providing real financial help to a struggling middle class," Sanders said in a statement. "But we have got to do more."

"At a time of massive income and wealth inequality, education, from pre-school through graduate school, must be a fundamental right for all, not a privilege for the wealthy few," Sanders continued. "If the United States is going to effectively compete in the global economy we need the best-educated workforce in the world, and that means making public colleges and universities tuition-free as many other major countries currently do—and that includes trade schools and minority-serving institutions as well."

"In the year 2022, in the wealthiest country on Earth," he added, "everyone in America who wants a higher education should be able to get that education without going into debt."


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