This was a big week for financial aid news.  On Wednesday President Biden announced a plan to forgive up to $10,000 in student debt for some borrowers and up to $20,000 for other borrowers.  And there was a lot of other good news bundled in there as well.  Here’s the good, the bad, and the ugly of what I know so far.

The good is that this will bring a lot of relief to a lot of student loan borrowers.  Any borrower with outstanding Federal Direct Student Loans as of July 2022 will receive up to $10,000 in forgiveness on their loan balance if their income for 2020 or 2021 was less than $125,000 for single tax filers, or less than $250,000 for joint filers.  If those same borrowers also received a Pell grant for their undergrad study, they will receive up to an additional $10,000 in forgiveness, for a total of $20,000.  Nobody is going to receive forgiveness of more than their current balance, but some borrowers may be fortunate enough to have their total outstanding balance forgiven.  The details of how this is all going to work is still a bit fuzzy.  It’s my understanding that if the Department of Education has the borrower’s income on file already, either from an income-driven repayment plan or from a current FAFSA form, there won’t be an application process required—the forgiveness should process automatically.  For those without income information on file, there will be an application process.  I’ve heard that the application will be short and simple, but that remains to be seen.  I’ve heard conflicting information about whether this application will become available in September or October of this year, but I’m sure we’ll know soon.  And there is a catch for those in their first year of graduate study this year.  If you were a dependent student for financial aid in the 2021-22 academic year, this will all be based on your parents’ income, not on your own.

The other big news in the announcement was yet another extension of the pandemic-related payment pause on federal student loans that began in March 2020.  Since that time all Federal Direct Loans have not required any payments, and the interest rate on these loans has been set at 0%.  These terms have been extended one last time, through December 31, 2022.  Repayment will resume in January for those borrowers not in another deferment status (like the in-school deferment while you are working on your law degree).  And loans will start accruing interest again in January.

These two things are the hot topics in the news, but there was additional good news tucked away in Biden’s announcement, which I think are even more exciting than the hotter, sexier topics.  The Department of Education is planning to make a major change to the way unpaid student loan interest is managed.  Previously, when a borrower with large student loans was making payments on an income-driven payment plan, the amount the borrower paid was oftentimes less than the amount of interest accruing.  And that extra interest was added on to the principal of the loan.  This is called negative amortization.  The borrower was making regular payments and their total amount due was growing rather than shrinking.  This is going to change going forward.  While it may take a while for the details to be released, the announcement on Wednesday claimed an end to the process of negative amortization.  If you make an income-driven loan payment (even a payment of $0), no extra interest will accrue.

The final piece of the announcement involves the creation of a new income-driven payment plan, which will be much more favorable to borrowers than the existing plans.  Existing plans calculate the monthly payment based on 10%, 15%, or 20% of the borrower’s “discretionary income,” dependent upon the plan.  This new plan will calculate that at 5% of discretionary income for undergraduate debt, but sadly will maintain the 10% calculation for graduate level debt.  There will be some kind of weighted calculation for those with both graduate and undergraduate debt.  But this new plan will still be an improvement even for those with only graduate level debt, because the definition of discretionary income is changing as well.  On the existing income-driven plans discretionary income is 150% of the current poverty guideline.  On the new plan that will be 225% of the poverty guideline, so the portion of the borrower’s income protected from inclusion in the student loan payment calculation is larger.

That was a lot of information for one little Presidential press conference.  And not everyone is happy about it.  Any kind of loan forgiveness comes with questions about equity.  Some think any forgiveness at all is too much (and I’m actually anticipating delays in implementation due to legal challenges from this camp).  Others think $20,000 is not near enough.  I’m still conflicted myself about the forgiveness portion of this, but I’m not angry and not begrudging anyone the forgiveness they may receive.  I think it will help a lot of people. But the other parts of the announcement are the more important parts, as they are solid first steps toward fixing a student loan system that hasn’t been serving students particularly well for some time now.  In a perfect world, my job as a financial aid administrator would be completely unnecessary because education would be affordable to all.  But we don’t live in a perfect world.

I’m sure that there is still a lot of clarification to come on all of this.  I’ll be watching for updates at https://studentaid.gov/debt-relief-announcement/ and through my many financial aid administrator networks.  When there is more news to share, you will certainly hear from me.  Until then, I hope that you are able to find some joy in all of this news.