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Update: On Sept. 29, 2022 the US Department of Education updated its loan forgiveness plan. Privately held federal student loans must have been consolidated before September 29, 2022 to be eligible for debt relief. CNN reports that around 770,000 borrowers will be impacted by this update, which comes the same day six states sued President Biden over the forgiveness plan.
President Biden made history in August 2022 when he announced his student loan forgiveness plan.
Certain details of the plan are still being ironed out, such as how much the plan will cost the federal government and taxpayers.
Nevertheless, college students and graduates across the nation are breathing a sigh of relief, as many of them will qualify for loan forgiveness.
What Does the Student Loan Forgiveness Plan Entail?
For the first time in history, student debt will be entirely forgiven for some 20 million of the 43 million people with student loans.
The plan will forgive up to $10,000 of federal direct loan debt and $20,000 of Pell Grant debt for borrowers who earn less than $125,000 a year, or $250,000 for couples filing jointly.
Additionally, the pause on federal student loan repayment (which began in March 2020 because of the COVID-19 pandemic) will be extended one final time through December 31, 2022.
Borrowers should expect to resume payment in January 2023.
These monthly payments may also become more affordable, as the Department of Education is proposing to cap monthly payments for undergraduate loans at 5% of a borrower’s after-tax income —half the rate that borrowers must pay now under most existing plans.
How Will the Plan Affect Latinos?
With Biden’s plan, about half of all Latino borrowers are expected to have their entire student debt forgiven, according to Excelencia in Education.
“Among Latino undergraduate students who began their postsecondary education in 2012, 51% borrowed funds to pay their undergraduate or graduate education,” writes Edwin Flores of NBC Latino.
The new plan could mean massive financial relief, especially for those who owe less than $10,000 and did not complete their degree.
For these borrowers, who have no credentials to help them earn better wages, paying off even a smaller loan can be difficult. In fact, Latinos are far less likely than their white peers to complete their degree.
Biden’s plan offers a variety of potential benefits to Latinos.
For instance, the plan could help Latinos meet life goals faster. Latino borrowers are the most likely to delay getting married and having children due to student loan debt compared to other races, according to Education Data Initiative.
The break in monthly expenses could also help Latinos recover from COVID-19, afford to save for retirement or an emergency fund, and afford other rising expenses, such as childcare, housing, and utilities.
Overall, the Biden Administration hopes the plan advances racial equity by targeting relief to borrowers with the highest economic need, such as Latinos.
Why Did Biden Enact the Loan Forgiveness Plan?
Research shows that those who earn a bachelor’s degree live longer, healthier lives, as they are more likely to secure a well-paying job with affordable healthcare coverage.
For many, the sky-high cost of college is difficult to swallow. Many students from low- and middle-income families have no choice but to take out loans if they want to get a degree that could potentially secure a more prosperous future.
What’s more, even if a college graduate rakes in a higher salary, it can still be difficult to pay off loans due to life circumstances and interest rates, which can range from 4.99% to 7.54%.
In a 2019 PEW Research study, borrowers reported that financial instability due to unexpected and daily expenses like groceries, childcare, housing, and transportation was the biggest barrier to paying off their student loans.
Additionally, growing balances due to interest rates overwhelmed and discouraged borrowers, leading to feelings of helplessness.
Unfortunately, feeling trapped by student loans is far too common in America.
College graduates across the country have taken to Twitter and news outlets to share their stories of paying off their initial loan amount – but still owing a considerable amount of money – sometimes even higher than their initial loan because of interest rates.
For example, Daniel Tapia graduated a decade ago with a bachelor’s degree in dental hygiene.
Tapia borrowed $60,000 in private student loans with a 9% interest rate. He has been making monthly payments since graduation. However, thanks to interest rates, his debt has only risen, and currently stands at just under $86,000, including $22,000 owned by the government.
The amount owed on his loan now exceeds the amount of the original borrowed amount – despite a decade of monthly payments.
“What I don’t get is if I took out a certain amount, and I paid that amount already, and I still owe more than I originally owed, it’s just nuts,” Tapia told Insider. “It’s mind-boggling to me that this total amount is not going down. It’s not going away.”
Because of his debt, Tapia has had to move back in with his mom to save on costs.
His debt prevents him from buying a home, saving for retirement, and building wealth – which were all promised to him if he received a college education.
What Happens Now with Student Loan Debt?
For Latinos and all people with student debt, Biden’s plan has the potential to move toward a more prosperous life by providing breathing room in monthly expenses.
In the future, the loan forgiveness plan could also help reduce the cost of college and hold schools accountable when they hike up prices, according to the White House.
If this part of the plan is successful, it could mean fewer people having to make tough financial decisions like Tapia, and more opportunity for those who may not have been able to afford college in the past.
“Any amount of loan forgiveness would provide relief to Latino borrowers, and investing in additional aid will help ensure future students are able to enroll in higher education and complete their postsecondary degrees,” wrote Deborah Santiago and Janette Martinez of Excelencia in Education.
Moreover, it is uncertain if the Biden Administration will take further debt-relieving action, and if student loans will ever be cancelled again in the future.
More information on claiming relief will be available to borrowers in the coming weeks, according to the White House.
Borrowers can sign up to be notified when this information is available at StudentAid.gov/debtrelief.