The Whitehouse announced today that it would be canceling $10k in student debt, or $20k if the borrower ever received any money as a Pell Grant, for anyone making less than $125k per year ($250k per year for households) based on data that the Department of Education has or will be collecting in the coming weeks. 

Biden is also extending the student loan payment pause to Dec. 31, 2022, meaning that no one will have to repay loans or accrue interest on federal student loans in 2022.

And possibly the single most compelling and surprising piece of this announcement is the fact that loan payments will be capped at 5% of borrower income, and if those payments are made, no interest will accrue.

It is somewhat difficult to state exactly how big of a deal this last part is. Income driven repayment had become a rat’s nest, useful on the surface to keep payments under control, but often done in such a way that the borrowers were not even making the full interest payments, leaving them with a larger loan to repay each month and trapping them in a cycle of a loan which becomes increasingly impossible to pay off. Out of everything announced today, this is likely to be the thing that gives the most relief to those who are in the most need.

But this, as well as the $10-20K forgiveness is based on your income. The way your income data is checked is different from the means-tested COVID relief checks that went out and were based on your tax returns, and seems to require that borrowers manually report their income to the Dept. of Education. Even if this application / reporting process is as easy as the federal government can make it, there will still be a non-insubstantial part of the population who does not engage with the system, just as there is for any federal program, and just like with any federal program the population that qualifies but does not engage will likely be lower income, less white, and with higher debt balances. But It is also likely that some portion of those making over $125k will simply not engage with the system, possibly making it a bimodal distribution, and making it difficult to do anything that targets just those who don’t report their income. What the Whitehouse decides to do with the population of debt holders who do not engage with the system will likely depend on how many of them there actually are, but it is difficult to imagine them getting more than 90% of the income data by borrow reporting before the end of 2022, when the loan repayment is scheduled to restart.

In total this will fully remove the student debt balances of around 9 million borrowers.

SoFi, one of the largest holders of student loans, seems to be doing well off this announcement, gaining some value in the market back after a trend of longer term decline.

This is an evolving story and we will continue to update you as the details of the plan are fleshed out.

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