Biden’s Student Loan Forgiveness Plan to Cancel Up to $20,000 in Debt for Millions

President Biden will forgive up to $20,000 in federal student loan debt for tens of millions of Americans, a move that will provide unprecedented relief for borrowers but is certain to draw political and legal challenges.

Following more than a year of internal debate, the president will announce later Wednesday that he will cancel $10,000 in federal student loan debt for borrowers making under $125,000 a year or couples making less than $250,000 a year, according to the White House. In addition, those who receive federal Pell Grants and make less than $125,000 a year would be eligible for total forgiveness of $20,000, the White House said. Independent estimates suggest the plan will cost more than $300 billion over 10 years.

The forgiveness applies to students with federal loans from undergraduate and graduate programs, as well as Parent Plus loans, White House officials said. While debt forgiveness is often treated as income for tax purposes, the canceled student debt will be exempt, like some other federal student debt forgiveness programs.

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Mr. Biden also announced an extension of the pandemic pause on student loan payments through the end of this year. Loan payments were set to resume for millions of borrowers after Aug. 31. The Education Department will release more details on how borrowers can claim relief in the coming weeks and will make an application available before the repayment pause expires at the end of the year. Around eight million borrowers could be eligible for automatic relief, the department said, because the department already has their income data.

A plan to forgive around $10,000 of student debt for borrowers who make under $125,000 a year or around double that for married couples would include most of the 40 million people with student debt. The action could render up to 15 million borrowers whose balances are under $10,000 free of student debt.

The provision for Pell Grant recipients would likely push that number higher, as around 6 in 10 borrowers with any federal loans also received a Pell grant. Pell Grant recipient graduates have about $4,500 more in debt than other graduates, according to a 2020 analysis of federal data by the Institute for College Access and Success, an advocacy group. Pell Grants are a form of federal financial aid for undergraduate students. Including an income cap and increased benefits for Pell recipients could serve to shield the administration from criticism that debt cancellation is regressive and primarily benefits high-income and well-educated people.

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The inclusion of Parent Plus loans means millions of families who have taken on massive debt could see their debt load decreased. While the government imposes a limit on the amount of undergraduate debt a student can take out, the Parent Plus program lets people borrow the total cost of attendance—room and board, books and personal expenses on top of tuition—for as many years as it takes to get the degree.

Current students are also eligible for loan forgiveness, according to a senior administration official. But students who have been claimed as a dependent will have their eligibility determined based on their parents’ or guardians’ income, the official said. Borrowers who earned less than the $125,000 income threshold in either the 2020 or 2021 tax year will be eligible for the loan relief, the official added.

To prevent student debt balances from ballooning in the future, the White House said it would propose a regulation that would cut from 10% to 5% the amount of discretionary income borrowers must pay each month on their undergraduate loans if they are enrolled in an income-driven repayment plan. The rule would also forgive loan balances for people enrolled in income-based plans after 10 years of payments, down from 20 under many of the current options, for borrowers whose original loan balances were $12,000 or less.

Under the proposed regulation, enrolled borrowers making less than 225% of the federal poverty line wouldn’t have to make monthly payments on their loans.

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The administration is basing its legal authority for cancellation in part on the Covid-19 national emergency, citing financial harms suffered by borrowers. It also rescinded a Trump administration memo that concluded that legal authority doesn’t exist for mass cancellation.

Republican lawmakers quickly criticized the idea. “Who will have to pay for Biden’s debt transfer scam? Hard-working Americans who already paid off their debts or never took on student loan debt in the first place,” House Minority Leader Kevin McCarthy (R., Calif.) wrote on Twitter. The Republican National Committee called the plan “Biden’s bailout for the wealthy.”

The coming announcement brings to a close a fierce debate within the administration over how to approach student loans. The president had long been skeptical of using his executive authority to forgive debt. He raised concerns in internal meetings that the measure could benefit wealthy people and instructed his staff to impose an income cap so the benefits didn’t flow to individuals making lucrative salaries, according to administration officials and others familiar with the discussions.

The president started warming to the prospect of using his authority to forgive some debt in recent months as senior aides, including White House chief of staff Ron Klain, made the case that it would be popular with young voters. Other Biden advisers argued that the move would help minority and low-income borrowers and be a legacy-defining moment for the president.

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But doubts about the economic and political consequences of loan forgiveness persisted at senior levels of the White House in recent weeks, with some worrying about backlash from people who didn’t go to college, didn’t take out loans or already paid them off. The impact of loan forgiveness on inflation was also an issue of concern for Mr. Biden and his team, the people said.

Mr. Biden had considered restricting loan forgiveness solely to undergraduate students, leery of helping people attending expensive business schools, for example. But White House aides and others argued that such a restriction would prevent teachers and nurses from getting the aid, an argument that resonated with Mr. Biden, some of the people said.

Mr. Biden repeatedly delayed making a decision. In May, he said he would make an announcement within a “couple of weeks,” which didn’t come to fruition.

Mr. Biden spoke by phone Tuesday night with Senate Majority Leader Chuck Schumer (D., N.Y.) to discuss the issue, and he separately held a joint call with Sens. Elizabeth Warren of Massachusetts and Raphael Warnock of Georgia, according to people with knowledge of the conversations. All three Democrats have been encouraging Mr. Biden to forgive student debt.

Mr. Biden returned to the White House on Wednesday from Delaware, where he was on vacation with his family.

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The administration’s move to cancel $10,000 in debt falls short of what borrower advocates and progressive Democrats have demanded: Full student debt cancellation, or at least canceling $50,000 per borrower. But it represents a sea change in the federal government’s approach to higher education finance, and is a tacit admission that the decades-old programs designed to make college affordable haven’t lived up to their promise.

“It’s hard to wrap your head around how life changing this is going to be for so many people. It is almost cosmic in scale,” said the Debt Collective, an activist group that has pushed for broad cancellation.

Polling has shown that Americans are divided on the issue of debt forgiveness, with support fluctuating depending on the details of the proposal. An NPR/Ipsos poll released in June found 55% support for the idea of forgiving up to $10,000 in student loan debt.

The decision, just over two months ahead of the midterm elections, will likely spark legal and political backlash from opponents of mass debt forgiveness, including Republicans who believe that voters will be turned off by a policy that puts taxpayers on the hook for individuals’ loans.

Republicans oppose broad student debt cancellation. In May, GOP senators led by Mitt Romney of Utah introduced a bill to limit presidential authority to cancel debt, though it hasn’t advanced in the Democratic-controlled Senate.

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Mr. Biden’s plan will test the legal limits of the federal government’s authority to cancel student debt. Its success could depend on how courts would interpret the education secretary’s powers under the 1965 Higher Education Act, which allows the secretary to “consent to modification” of loans, and “compromise, waive, or release” unspecified amounts of student debt.

Advocates for broad cancellation say the lack of explicit constraints in the law is deliberate, giving the executive branch flexibility with its “compromise authority” to manage its relationship with borrowers. They note that presidents of both parties have used the law to forgive debt on a more-limited scale.

Mr. Biden has previously raised questions about whether he has the power to take executive action to cancel student debt on a large scale. “I don’t think I have the authority to do it by signing with a pen,” Mr. Biden said during a CNN town hall last year. Some of Mr. Biden’s advisers also have privately raised concerns that broad debt forgiveness could face legal challenges, The Wall Street Journal has reported. Other advisers contend the president is on solid legal ground.

While the decision to cancel debt for so many borrowers is by far its biggest announcement related to student debt, the Biden administration has made other significant changes to education finance. Using existing programs, it has canceled around $32 billion in loans. Additionally, the administration has overhauled congressionally approved programs for public servants and lower-income borrowers, putting millions closer to eventual forgiveness. It is also in the process of overhauling a debt-relief program for students who have been defrauded by for-profit schools.

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Economists say that a tailored debt cancellation plan is unlikely to exacerbate short-term inflationary pressures, but could add to them in the long term, especially if universities continue to raise tuition because students might expect their loans to eventually be canceled.

Even some economists usually aligned with the White House, including former Clinton administration Treasury Secretary Larry Summers and former Obama administration economist Jason Furman, have criticized the cost of a potential student debt cancellation and warn that it could force future spending cuts or tax increases.

A budgeting model from the Wharton School of the University of Pennsylvania estimated this week that forgiving $10,000 in federal student loan debt with income caps would cost around $300 billion over a 10-year period.