In an effort to obtain higher education, Americans have accumulated $1.75 trillion in student loan debt. Combined with rising interest rates and record inflation, escaping debt may have felt increasingly out of reach. But there may be cause for hope.
On August 24, the Biden Administration announced that it will cancel up to $20,000 worth of federal
"There was a sense of 'finally' after hearing that this was coming since the beginning of summer," says Lydia Jilek, senior director of voluntary benefits solutions at Willis Towers Watson, the multinational advisory. "We were quickly approaching September 1, when those payments would start up again, so there was a bit of relief when we heard."
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Jilek notes that Biden's forgiveness plan goes further than the $10,000 cancellation. The Department of Education has proposed a new income-driven repayment plan for undergraduate loans that limits monthly payments to 5% (instead of 10%) of the borrower's discretionary income, which is now defined as the amount earned above 225% of the poverty level rather than 150%. A borrower with a gross income of $60,000 will now pay around $120 per month on an income-driven plan, as opposed to $330. A borrower who is married with two kids, with the same gross income, would pay $0 a month.
Additionally, monthly interest will no longer cause a borrower's loan to grow if they make all their payments. The federal government will cover the borrower's unpaid monthly interest.
"Interest will not continue to accrue the way it does now," says Jilek. "Right now, you could be paying on an income-driven program on schedule, but the interest will still cause your balance to go up."
Biden's plan will also forgive loan balances of $12,000 or less after ten years of payments — the Department of Education estimates that nearly all community college borrowers will be debt-free within 10 years.
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While Biden's student loan relief is good news for low- to middle-income earners, employers may also have cause for celebration, and another look at their debt management benefits, says Jilek.
"Some employers are going to see this news, and decide to target their employee benefits dollars to another program," she says. "On the other hand, the importance of benefits like tuition reimbursement and student loan repayment programs may come to the forefront for some employers."
Jilek predicts employers will be asking brokers and consultants if workers will need assistance navigating and even applying for Biden's relief plan. While the Department of Education estimates that eight million borrowers will be forgiven automatically since their income information is already accounted for, some may have to formally apply. The application is likely to go live early October, and the deadline is December 31, 2023.
Beyond navigation, employers may find that a substantial portion of their workforce carries private loans and will not see relief. And given that the average student loan debt is approximately $37,000, those just entering the workforce may especially benefit from employer-provided relief too. Black borrowers, who owe an average of $55,000 compared to a white borrower's $28,000, will also need more help than Biden's plan provides.
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"It comes down to understanding your employee population," says Jilek. "Have a good understanding of your employees' debt profiles, and leverage your advisors to understand what programs are out there."
Jilek also reminds employers to keep an eye on further guidance from the Biden administration as well as possible lawsuits against the executive order. President Biden backed his executive order by citing COVID and its economic consequences as a national emergency, but that reasoning may be put to the test. And if Republicans gain enough seats in the House after the midterm elections, they could sue next year, explains Jilek. Then there are those who could claim they have been harmed by the executive order and may have standing for a lawsuit: a person who makes just over $125,000, someone who paid off their federal student loan debt a few years ago or even a company that is a federal student loans servicer.
"We need to wait for a little bit more clarification," says Jilek. "There's a fair amount that we don't know yet."
