Why Forgiving Student Loan Debt Is So Complicated

President Joe Biden has promised millions of Americans saddled with student loan debt that help is on the way.

Now, he has only three months to figure out what he’s going to do.

The looming decision has set off a furious debate in the halls of the West Wing, as aides, lawmakers and allies argue over who should be eligible for loan forgiveness—and how much they should get.

Democrats are urging Biden to go big, hoping that sweeping relief can energize voters who will decide which party controls Congress. But Biden needs a plan that will stand up to inevitable legal challenges and avoid blowing a hole in federal budgets or contributing more to runaway inflation. He’ll also need to decide if borrowers who racked up debt in graduate school will be eligible or if his program will only address undergraduate debt.

So far, White House officials have indicated Biden favors a more restrained approach, with limits on the amount of relief and the income level below which borrowers are eligible. The president himself has rejected a plan pushed by Senate Majority Leader Chuck Schumer and progressive Democrats including Senator Elizabeth Warren and Representative Alexandria Ocasio-Cortez that would wipe away $50,000 in debt per student. He has signaled support for legislation eliminating $10,000 per person.

But going small risks alienating not only the president’s base, but the 43.4 million people in the US who currently carry federal student loan debt.

Whatever Biden decides will have huge legal, political and economic implications—and he has only until Aug. 31 to decide. The president has promised an announcement by then, when the current forbearance period concludes.

As with most things involving the government and financial system, it’s complicated. Here’s why:

Over $1T in Limbo

Total federal student loan amount by loan status

Q1 2020

Q1 2022

Payment not required

Payment required

Over 25 million people had federal student loans in forbearance in Q1 of 2022, compared to just 2.8 million in 2020.

$151.3B

$761.7B

in 2020

$1.0T

paused in 2022

$16.5B

$110.7B

The Biden Administration announced in April that millions of student borrowers in default or delinquency will be allowed to reenter repayment with good standing.

$102.5B

Q1 2020

Q1 2022

Payment not required

$1.0T

paused in 2022

Over 25 million people had federal student loans in forbearance in Q1 of 2022, compared to just 2.8 million in 2020.

$110.7B

$151.3B

$102.5B

The Biden Administration announced in April that millions of student borrowers in default or delinquency will be allowed to reenter repayment with good standing.

Payment required

$761.7B

in 2020

$16.5B

Q1 2020

Q1 2022

Payment not required

Over 25 million people had federal student loans in forbearance in Q1 of 2022, compared to just 2.8 million in 2020.

$151.3B

$1.0T

paused in 2022

$110.7B

The Biden Administration announced in April that millions of student borrowers in default or delinquency will be allowed to reenter repayment with good standing.

$102.5B

Payment required

$761.7B

in 2020

$16.5B

Sources: Department of Education, Enterprise Data Warehouse

Currently, there’s about $1.76 trillion in outstanding student loan debt in the US, which is equivalent to about 7.2% of the US gross domestic product. The total has more than tripled since the Great Recession.

About $1.6 trillion of that—loans owed to the federal government, as opposed to private loans—went into forbearance at the beginning of the pandemic.

75% of Federal Loan Borrowers Owe Less Than $40,000

And make up only 30% of the total outstanding federal loan portfolio

$5–10

<$5K

$10–20

$20–40

$100–200

$40–60

$60–80

$80–100

$200K+ loan amount

Total owed by loan size

$1.6T

Number of borrowers

45.7M

7.8M

7.4

9.2

9.7

4.3

2.6

1.4

2.4

0.9

34.1M borrowers

$5–10

$200K+ loan amount

<$5K

$10–20

$20–40

$40–60

$60–80

$80–100

$100–200

Total owed by loan size

$1.6T

No. of borrowers 45.7M

7.8M

7.4

9.2

9.7

4.3

2.6

1.4

2.4

34.1M borrowers

Total owed by loan size

$1.6T

No. of borrowers 45.7M

<$5K

$5–10

7.8M

$10–20

$20–40

7.4

$40–60

34.1M borrowers

9.2

$60–80

$80–100

9.7

$100-200

4.3

2.6

1.4

$200K+ loan

2.4

Note: Due to rounding and timing differences, the total figures differ slightly from other totals also reported by the Department of Education
Sources: Department of Education, Enterprise Data Warehouse

A forgiveness program would be designed to help lower- and middle- income people, with potential income caps for qualification, the administration has said. People making $125,000 a year would likely be ineligible for the program.

A majority of borrowers have less than $40,000 in loans outstanding, and the average amount of debt for federal student loans is $37,113. Adding in private loans, that figure is about $40,904. Forgiving $10,000 per borrower would clear loans for 15 million and would cost up to $380 billion.

Forgiving $10K for All Would Cost $380B

Total federal student loans and cost of forgiveness

2020

2016

2022 $1.6T

2012

$1.5T

$948B

$1.2T

2008

$577B

2008

$1.6T in federal student loans

$50K for all: around $950B

$10K for all: around $380B

Biden has already forgiven $17 billion with reforms to the Public Service Worker Loan program, for borrowers with a permanent disability and those who attended the predatory ITT Technical Institutes.

2020

2016

2022 $1.6T

2012

$1.5T

$948B

$1.2T

2008

$577B

2008

$1.6T in federal student loans

$50K for all: around $950B

$10K for all: around $380B

Biden has already forgiven $17 billion with reforms to the Public Service Worker Loan program, for borrowers with a permanent disability and those who attended the predatory ITT Technical Institutes.

2022 $1.6T

2020

2008

$1.5T

2016

$1.2T

2012

$948B

2008

$577B

$1.6T in federal student loans

$50K for all: around $950B

$10K for all: around $380B

Biden has already forgiven $17 billion with reforms to the Public Service Worker Loan program, for borrowers with a permanent disability and those who attended the predatory ITT Technical Institutes.

Note: Calculations of debt forgiven for two scenarios, $10,000 for all and $50,000 for all, based on Department of Education data on loans by debt size and are approximate.
Sources: Department of Education, National Student Loan Data System

According to analysis of 2019 income data by Matt Bruenig at the left-leaning People’s Policy Project commissioned by The Washington Post, 97% of all student debt is held by people earning below $150,000 for individuals or $300,000 for couples. But the percentage of the population with some kind of student debt is constant across income groups.

Student loan debt also spans across age groups. The most total debt is held by those ages 35 to 49, with 14.4 million borrowers owing about $623 billion in total, but even older generations are affected. About 2.5 million people 62 and older owe an average of $40,000 per borrower.

In addition, Black college graduates owe more in student loan debt than other racial groups, with an average of $52,000 for a bachelor’s degree. Four years after graduation, about half owe an average of 12.5% more than they borrowed.

Around 45% of Black Borrowers Owe More Than $40K

Average student loan debt one year after graduation

Black

White

Hispanic/Latino

Asian

24%

48%

50%

62%

Less than $25K

31%

35%

30%

27%

$25 to $40K

45%

18%

19%

11%

More than $40K

Black

White

Hispanic/Latino

Asian

24%

48%

50%

62%

Less than $25K

31%

35%

30%

27%

$25 to $40K

45%

19%

11%

18%

More than $40K

Black

24%

Less than $25K

31%

$25 to $40K

45%

More than $40K

White

48%

Less than $25K

35%

$25 to $40K

18%

More than $40K

Hispanic/Latino

50%

Less than $25K

30%

$25 to $40K

19%

More than $40K

Asian

62%

Less than $25K

27%

$25 to $40K

11%

More than $40K

Note: Percentages may not add up to one hundred due to rounding.

About 85% of 18-to-29 year old Americans across political parties support some kind of student debt forgiveness, according to a Harvard Institute of Politics poll. Biden’s approval rating among this group is 41%, down 18 percentage points from a year ago.

Legal experts have outlined Biden’s authority to cancel some student debt through executive action, and many say he can do it. Yet there is some division among experts on how much forgiveness he can order and through what avenue he can do so. The specifics could determine whether the order is challenged in court.

It’s also politically fraught. Republicans have attacked Biden’s forgiveness plans with claims that it would add to inflation and be unfair to those who did not attend college or already paid off their loans.

Senate GOP Leader Mitch McConnell has even claimed that Biden does not have the power to forgive the debt. Republican lawmakers introduced legislation that would prevent Biden from forgiving loans through executive action, though it will almost certainly not be considered in either chamber.

There has been some progress toward student loan forgiveness, albeit smaller than many desire. The US Department of Education recently forgave about $6.8 billion for more than 113,000 borrowers, due to adjustments to its Public Service Loan Forgiveness Program, which helps nonprofit and government employees. The relief will average about $60,000 per borrower.

But even with additional student loan forgiveness, many still won’t be able to pay back their loans on time. Before the most recent extension, the Federal Reserve Bank of St. Louis said that delinquency rates could reach their previous highs of 10% when payments resumed. Among those with increasing balances prior to the pause, about 83% had not paid down any of their loans as of March.

In 2019, American borrowers paid around $22.4 billion in interest payments on federal student loans. In 2021, that figure was just $2.3 billionEstimates suggest that borrowers have saved $1.5 billion in total every month that they have not had to pay interest on their loans.

Meanwhile, the pause in payments had cost the federal government more than $100 billion, as of January, according to government estimates.

Borrowers’ Interest Payments Were Skyrocketing Before the Pause

Total interest paid on federally held student loans each fiscal year

$22.4B

$20B

15

10

5

$2.3B

0

2012

2016

2018

2021

$22.4B

$20B

15

10

5

$2.3B

0

2012

2016

2018

2021

$22.4B

$20B

15

10

5

$2.3B

0

2012

2016

2018

2021

Source: Department of Education

While the pause has left borrowers, servicers and the government in a limbo, restarting payments has technical complications as well. At least 14 million borrowers’ loans will have to shift to new services after some providers ended their contracts with the federal government. That process could result in missing payment data—potentially delaying any kind of forgiveness as well.

Around 40% of Borrowers’ Servicers Are Shifting

= 10K borrowers

Servicer changing

New servicer

FedLoan elected not to renew its contract in 2020. After an extension, all 8.0 million borrowers with loans totaling over $300B are being distributed across Nelnet, Aidvantage and MOHELA.

Navient (formerly Sallie Mae) did not renew its contract. Over 6 million borrowers’ loans were serviced by Navient in 2019. Aidvantage took over in 2021.

2019

2021

= 10K borrowers

Servicer changing

New servicer

2019

FedLoan elected not to renew its contract in 2020. After an extension, all 8.0 million borrowers with loans totaling over $300B are being distributed across Nelnet, Aidvantage and MOHELA.

Navient (formerly Sallie Mae) did not renew its contract. Over 6 million borrowers’ loans were serviced by Navient in 2019. Aidvantage took over in 2021.

2021

= 10K borrowers

Servicer changing

New servicer

2019

FedLoan elected not to renew its contract in 2020. After an extension, all 8.0 million borrowers with loans totaling over $300B are being distributed across Nelnet, Aidvantage and MOHELA.

2021

Navient (formerly Sallie Mae) did not renew its contract. Over 6 million borrowers’ loans were serviced by Navient in 2019. Aidvantage took over in 2021.

Note: Because sources differ, totals are an estimate from December 2019 and December 2021 where available. For MOHELA and OSLA, estimates are for the fiscal year 2019 and 2021.
Sources: Department of Education, National Student Loan Data System, Higher Education Loan Authority of the State of Missouri, Oklahoma Student Loan Authority, Granite State Management and Resources

And forgiving $10,000 in loans won’t change the exorbitant cost of college tuition. The average price for undergrads in four-year programs was $37,650 at private universities and $27,020 for out-of-state students at public colleges in the 2020-21 school year.