People invest in higher education generally because of its promise of upward mobility. The idea is you pay now for training that will land you a high-paying job in the future. In today’s world, it often doesn’t work out that way. The cost of higher education has risen over the past 40 years, but grants for low-income students, called Pell Grants, have not kept up. College costs three times as much as it once did, while Pell Grants have remained about the same. This means that the only way for many families to afford college is by borrowing money. Even if you do have to borrow money to pay for college, the idea is you’d be able to pay back these loans once you get a well-paying job in the future. But, for too many people, student loans are a lifetime burden that gets in the way of their ability to build wealth or maintain good credit.
What Is Pres. Biden’s Student Loan Relief Plan?
Pres. Biden’s plan consists of three main parts: loan forgiveness, more manageable loan repayment, and reducing the cost of higher education.
Loan Forgiveness
If your annual income is less than $125,00 (or $250,000 for married couples), you could qualify for loan forgiveness. Your loan must be backed by the Federal Government. Pell Grant recipients can get up to $20,000 forgiven, while non-Pell Grant recipients can get up to $10,000. The pause on loan repayment put in place during the COVID-19 pandemic will also be extended to December 31, 2022.
More Manageable Repayment
Monthly payments will be capped at 5% of income for low-income families. This will cut loan payments in half and lower annual payments by roughly $1,000. Those who work in public service will now have an easier path towards getting more relief as well. Programs in place will cover unpaid monthly interest as long as you keep paying each month, preventing loans from ballooning to non-affordable amounts.
Keeping the Cost of Higher Education Reasonable
The President is also taking steps to keep the cost of higher education more affordable. He plans on increasing Pell Grants and making community colleges free again. Pres. Biden says he will also hold private universities accountable for keeping their tuition reasonable.
The Skyrocketing Cost of Higher Education
While the price tag of higher education has skyrocketed, Pell Grants for low-to-middle income students have stayed about the same. These grants are intended as assistance to those who could not otherwise afford college. But since they now cover such a small percentage of the cost, young adults are left borrowing huge sums of money. They are often unable to pay it back and higher education becomes a lifelong burden instead of a ticket to a better life.
How Does President Biden’s Plan Help Current Students?
Current undergraduate students will benefit from Biden’s plan, even though they have not started paying off their loans. The payback rate of 5% of income will apply if their future income isn’t high enough, and they will most likely be eligible for the forgiveness program. “Current students still get the benefits of the payment and interest pause, specifically the interest won’t start accruing until January 2023,” notes Erik Kroll, a certified financial planner and owner of Student Loans Over 50.
Does the Student Loan Plan Help Future Students?
Teens who are applying to college now don’t have any loans yet, so they won’t qualify for immediate loan forgiveness. However, they may be able to keep their monthly repayment amount at 5% of their discretionary income once it’s time for them to start making payments. “This is still in the proposal phase, but it could make things simpler for new borrowers if it becomes the de facto IDR choice in the future, rather than the multitude that borrowers have to choose from now,” says Kroll. Future college attendees will also be able to avoid paying added interest on their loans as long as they make the payments. Along with the monthly payment cap, loans will be canceled after 10 years if they are still not paid off. “The income-based cap is the really big news here for the long term,” says Melanie Hanson the editor-in-chief of EDI Refinance. “This makes college a much more affordable proposition in the long run for those who still have this decision in their future.”
Student Loan Forgiveness for Parents
Many parents of teens applying to college are still paying off their own student loans. Pres. Biden’s new plan can help you get into a better place financially for affording your own kids’ education. You may be able to get some or all of your debt canceled, and any remaining debt can be refinanced so you can budget more of your income toward your kids’ college savings. “Parents should see this as a chance to finally start saving more for their retirement, or perhaps to focus on paying off another debt like a mortgage,” says Hanson. “Between paying off their own student debt and helping to finance their children’s education, many parents these days have a lot less saved for retirement than they should.” There was an error. Please try again.
