The Biden Administration recently announced a student loan debt relief plan offering up to $20,000 in debt forgiveness for certain borrowers. The announcement also contained details about a new income-driven repayment plan that will reduce monthly payments for lower and middle-income borrowers. On this episode of Policy Outsider, Brian Backstrom, director of education policy studies at the Institute, joins guest host Joel Tirado to discuss the details of this relief plan and the interesting challenge of calculating the size of its benefits.

Guest:
Brian Backstrom, director of education policy studies at the Rockefeller Institute

For more in-depth analysis, visit the student debt research series below.

• Transcript

  Transcript was generated using AI software and may contain errors.

  Alexander Morse

  Welcome to Policy Outsider presented by the Rockefeller Institute of Government. I’m Alex Morse. For today’s conversation, you’ll be with the Institute’s Director of Communications, Joel Tirado, filling in as host as I research what a vacation feels like. Joel is joined by the Institute’s Brian Backstrom, director of education policy studies to discuss the student loan debt relief plan recently announced by the Biden Administration. The relief package offers up to $20,000 for certain borrowers and also contains details about a new income driven repayment program that will reduce monthly payments for lower and middle income borrowers. What does student debt relief look like in practice? What administrative challenges are there for implementing such a wide-reaching program? How much will student debt relief actually cost? All of this and more coming up next.

  Joel Tirado

  Brian, it’s good to have you on the show.

  Brian Backstrom

  It’s great to be here again.

  Joel Tirado

  So let’s let’s jump into the details of this plan. So you heard me mentioned that it was up to $20,000. For certain types of borrowers. I’ll get out of the way you tell us, give us the breakdown of what this loan forgiveness program looks like.

  Brian Backstrom

  In late August, the Biden administration announced its plan for student debt forgiveness, and had a few different components long awaited people were speculating what it would contain. And we finally got to see some of those details in the last week of August. That’s comprised of three basic components. The first and most major one, the one that’s getting most of the attention is that individuals earning less than $125,000 a year are eligible up for up to $10,000 in student loan relief. Now, if you got a Pell Grant when you’re in college, and that’s federal grants that are given to students who are in the most financial need, if you got a Pell Grant, you’re eligible for up to $20,000 in student loan relief. And of course, this is not to exceed the balance of your outstanding student loan. So if you have $1,000, or $5,000, in outstanding loans, it will wipe out completely. So it’s up to $10,000 for most students, and up to $20,000 for Pell Grant recipients, so I wouldn’t get the last 2000 Use your example, I wouldn’t get like a $2,000 check to bring me up to 10,000, I just get the 8000 relieved and then, right. So if you have less than $10,000, you won’t be making any more student loan payments. If you have less, if you’ve got a Pell Grant and you have less than $20,000, you won’t be making any more student loan payments. So it’s a quite a significant debt relief package. That Biden administration also said that student borrowers don’t have to make any payments through the end of the year. So we’re continuing the pause that was initiated during the COVID years. Just as people get used to the relief package, get some of the administration stuff out of the way. Biden administration says let’s just continue the pause through the end of the year and January, we’ll start fresh. The final element of the debt relief package was the creation of a brand new Income Based Repayment Program. And that’s something where student borrowers can get some sense of affordability attached to their required repayment amounts. And right now, income based repayment programs are about 10% of disposable income, you can exceed that the new plan that was just announced caps, the amount of your monthly debt payments, at no more than 5% of your disposable income. So that’s a pretty significant savings for people, particularly for people on the low income end of things, makes it much more affordable. Also, as part of that new plan, they stopped capitalizing interest, meaning you’re no longer going to pay interest on top of your interest at some people were seeing their their payments, required payments actually rise in the later years, as interest kept getting added to the balance of outstanding loan. And the last bit is that they’ve the new Income Based Repayment Program will forgive student loans after 10 years instead of 20 years of good faith payments for anyone whose original student loan balance was $12,000 or less. So those are the three main components of the administration’s plan. It’s big, it’s bold, it’s innovative, and it’s designed to provide significant relief.

  Joel Tirado

  So that kind of gives us a nice, neat framework for talking about this in a little bit greater depth. So let’s jump in to the first part of that. You know, $10,000 for individuals making up to $125,000 and then the the for households it’s $250,000?

  Brian Backstrom

  Correct from married individuals. Yeah.

  Joel Tirado

  Okay, and and then the $20,000 for Pell Grant recipients. Talk just briefly about the Pell who are Pell Grant recipients.

  Brian Backstrom

  That’s the lowest income of college going individuals. It’s a needs based program run by the federal government. When you apply, you’re eligible based on your income, and they are targeted to the neediest individuals. There are some statistics that show that lower income students tend to borrow more than higher income students. Pell Grants are designed to offset some of that borrowing burden. But it doesn’t always work. And I think that this is a creative way that the administration took to make this relief program more means tested, lowest income individuals, while they were students are going to get the largest relief.

  Joel Tirado

  You know, another part of what you brought up in your initial overview here is this change from a 10% cap on repayment, 10% of your monthly income.

  Brian Backstrom

  Discretionary income

  Joel Tirado

  Discretionary income, that change from a 10% cap to a 5%. Cap. How, how are those plans calculated? And how does that program, how does that program work?

  Brian Backstrom

  Typically, income based repayment programs were designed so that if you earned less, you’d have to repay less, it was a way of sort of equalizing the burden of debt between low income earners and high income earners. And so income based repayment programs are exactly that, the federal government will look at what your income is, and will adjust your required student loan repayment based on whatever that income is. Previously, you’re capped at 10% of your discretionary take home income, in terms of how much you’ll have to repay for your student loans.

  Joel Tirado

  Let me jump in income driven repayment plans were not just what everyone was using, there was there’s just a select portion of people using income driven repayment plans?

  Brian Backstrom

  That’s correct. It was open and available to anyone to use. And it was designed as, as a creative way to keep the burden down on people. The administration of it was a nightmare, the application process was horrendous. And in fact, less than 20% of student borrowers are enrolled in an Income Based Repayment Program. So this effort was designed to stop some of that nonsense and make it even more incentivized for people to enroll. And I think that’s one of the big challenges that the whole student loan program has is some of the creative and beneficial repayment programs that have been made, aren’t being picked up by student borrowers, because it’s too burdensome to even walk through that administrative door. So we’re going through a simplification process. And part of that is this creation of a brand new they’re starting from scratch, creating a brand new income based repayment program, I think it’s the will be like something like the eighth or ninth program that exists as they tried to tinker and make things work.

  Joel Tirado

  Ninth time is the charm.

  Brian Backstrom

  I think that’s right. Previously, the programs said that to determine your discretionary income, that would be up to 150% of the federal poverty line, in addition to dropping the cap to 5%, this new plan also says that your discretionary income will be elevated up to 225% of the federal poverty line. So not only are you going to be paying less of your take home pay, you get to protect more of your take home pay before that calculation is made.

  Joel Tirado

  I see. So you know, not Not to put you on the spot with with real numbers here. But, but let’s say, you know, let’s just use the number $50,000 as income, and let’s say, you know, 150% of the federal poverty line was and again, making making this up just to illustrate this point, but that that’s say that’s $30,000. So then your discretionary income is that $20,000 That remains, you know, you subtract the 30 from the 50.

  Brian Backstrom

  Correct.

  Joel Tirado

  So, this is elevating that threshold, let’s say to $40,000, and so now 10,000, so you’re instead of getting 10% of the $20,000 from before, you’re getting 5% Of those, okay?

  Brian Backstrom

  So it really is a significant, a significantly advantageous program for student borrowers to enroll in. I happen to think that income based repayment programs are a fabulous way of the government saying we want to help equalize the burden among everybody low income earners should be forced to pay back less high income earners should be forced to pay back more. And so they always made sense from the get go was a good idea that was, you know, the government got involved in so. So the administration of it got a little messed up. And every fix that they tried to do was really made it a patchwork. And I think that the administration was very smart, and starting from scratch. And they were very generous and the structure of this program.

  Joel Tirado

  So now I want to jump into the potentially, you know, a little bit more wonky component here, these numbers were announced. And the natural sort of reaction for some policy focus folks, and maybe, maybe people generally is, how much money are we talking about, you know, this is $10,000 per borrower, you know, with the with those income thresholds, but still is significant, not millions of borrowers, presumably will be receiving some kind of relief under this plan. So how much money is that going to cost the federal government?

  Brian Backstrom

  Everybody was asking that question. And so everybody turned to their nearest economist for the answer. And of course, as we know, when you talk to different economists, you get different answers. Everyone has seemed to sort of land on the Wharton budget model, which is a calculation done out of University of Pennsylvania’s Wharton School of Business. It’s very well regarded model. But again, there’s a lot of unknowns there. The Wharton estimate for the loan forgiveness component, was it would be somewhere between $469 billion and $519 billion for that forgiveness component. And there’s lots of challenges to knowing the details. So this really is just an estimate. But that’s sort of the figure that’s being cited by most policymakers around the nation as what we’re talking about for that component of the plan.

  Joel Tirado

  469 to 519 billion.

  Brian Backstrom

  Right. And that was designed in that even that variation. I mean, a good example of one of the challenges that variation, according to Wharton was whether it applies to students currently in school. Oftentimes, those students aren’t making repayments. And so there are some questions that remain about whether students still enrolled in school are going to be eligible for this relief, or if it’s just graduates making payments.

  Joel Tirado

  And so how do we get to what the number looks like for for New Yorkers?

  Brian Backstrom

  Well, this is going to come with a lot of caveats. So let me say some of those, some of those caveats. First, as we talked about a little bit before, about 8 million borrowers, which is less than 20% of the number of student borrowers are already enrolled in an Income Based Repayment Program. We know their incomes because they have to report that.

  Joel Tirado

  Nationwide.

  Brian Backstrom

  Nationwide. We know that, that their income and so we can see who matches and who qualifies, because they’ve already provided that information to the government and anecdotal evidence says that some of the people, some of the borrowers enrolled in income based repayment programs are already starting to see benefits. They check into their account. And they’re like, Oh, my goodness, yeah, I’ve gotten some relief.

  Joel Tirado

  So the ones who did the hard work of jumping through all –

  Brian Backstrom

  Made it through.

  Joel Tirado

  – the straight of administrative hoops that they are experiencing some relief already.

  Brian Backstrom

  Right. But that means 80% of borrowers nationwide, we don’t yet know, their income levels and their income eligibility needs to be determined. The application for this debt relief hasn’t been made available yet. It’s supposed to come out in early October. And so we have to see what the results are of that who will apply for the the debt relief, hopefully, everybody and then we’ll have to wait to see how the income levels match up with the eligibility, we’ll have to see how Pell Grant eligible students are, what their outstanding balances are. These are some of the things that we don’t know. There’s also some elements of the plan where people who were in default have a chance to reinstate their standing and then qualify for debt relief. So these are all moving numbers that we don’t know. There’s even some private loans, federal family education loans. And we’re still waiting to see whether those borrowers will be involved in and eligible for this debt relief. So you know, it’s it’s sort of a squishy number. But we can still get there, or we can still get there for New York, New York has the third highest college enrollment of any state. And that’s about six and a half percent of all college enrollees nationally, are in New York, we have about 2.4 million student loan borrowers, and that’s about 5.6% of the total, we have more than $90 billion in outstanding student debt in New York. And that’s about 5.8% of the total. So we’re all hovering around this this 6% mark. So if you do a back of the envelope calculation and use the Wharton budget model, for what it estimates the benefit of this loan forgiveness, it would come out to a little bit more than $30 billion in loan forgiveness benefits just to New Yorkers alone.

  Joel Tirado

  So 6%, roughly 6% of that 500 billion numbers is 30 billion for New Yorkers.

  Brian Backstrom

  Yeah. Which is pretty good. And, and Wharton’s also did some calculation of overlapping household income estimates and looking at where they think some of these benefits will align. And they have encouraging estimates that 40% of all the benefits nationwide of this program will go to household incomes making less than $53,000 a year. About 60% of the total benefit package will go to households under $88,000 a year.

  Joel Tirado

  What about the fact that New York is a, you know, there are a lot of high income earners in New York State and presumably, some of those high income earners have some debt. Do you think, do you think that New York’s income distribution maybe influences those numbers one way or another? Or does that sort of kind of get washed out?

  Brian Backstrom

  Well, it’s possible. We did an analysis here at the Rockefeller Institute of what SUNY graduates earned 5-10 years out. And if you look at that almost all graduates, on average have from a SUNY school will qualify under the income levels dictated for this relief program. So that’s about half of all college enrollees in New York anyway. So I think that the high income earners, maybe they paid off their student loans already and won’t qualify. But these are some of the unknowns that we know. I really think that if we’re talking, if we take the Wharton budget model, as fairly accurate, that we’re talking about $500 billion in loan forgiveness alone, then I think it’s a reasonable thing to say that in New York, we can see somewhere around $30 billion of benefit to student loan borrowers.

  Joel Tirado

  So Brian, did the Wharton budget model have anything to say about the Income Based Repayment Plan and the changes that this relief package would bring to that program?

  Brian Backstrom

  Absolutely. And I think this is one of the interesting examples of the nuances of all this program and the difficulties in calculating exactly what the size benefits is going to be. The Wharton budget model estimated that if program use by student borrowers in and enrollment in income based repayment programs stayed fairly similar to what historical patterns have been, that that would provide about $70 billion in benefits under the new structure. If, however, the incentives created by this new program, particularly cutting it from 10% to 5%, and increasing the allowable discretionary income. If it created an incentive that made a stampede of new enrollees towards this program, the benefits under that program could amount to as much as $450 billion and that would bring the total student debt relief under this entire incentive to over $1 trillion.

  Joel Tirado

  And that’s when you add in the 500 ish billion dollars from the direct relief up to $20,000 for 12, grant recipients etc.

  Brian Backstrom

  Correct and the added amount for the repayment pause through the end of the year, too. So those elements all together, under the maximum scenario, Wharton budget model estimates that to be more than a trillion dollars.

  Joel Tirado

  That’s significant.

  Brian Backstrom

  I think so.

  Joel Tirado

  Brian, I’m going to ask you about, you know, this may not necessarily be your area, but for the folks who receive this relief, and then, you know, folks who may enroll in this new income based repayment plan, is there any research showing how this kind of forgiveness program might affect things like home buying or starting a business or other big life decisions like that.

  Brian Backstrom

  But once again, we have the clash of the economists here. There’s quite a few economists who are coming out and saying this is going to cost money that these benefits need to be viewed as lost revenue that the federal government could be collecting, and therefore it is an expense, and therefore it could be inflationary. It could have long term consequences as a 10 year budget window. So a bunch of opinions on that side of the ledger, if you will. There are others that say, look, you’re instantly creating more disposable wealth, particularly if you’re giving current student borrowers relief from their monthly payment amounts, like you would under the new income based repayment program. With more discretionary pocket money, there’s going to be more economic activity, everything from consumer spending to long term investment. And so those two opinions, clash, they outweigh each other. We don’t know what the behavior is going to be. But what we do know is that with less student debt, people are going to feel less burdened. And I think that was the main objective of the initiative here.

  Joel Tirado

  I’m hoping you’ll humor me here. We know that there are 43 to 45 million student debt borrowers, student borrowers…

  Brian Backstrom

  Yeah, little more than 43 million borrowers nationwide.

  Joel Tirado

  Okay, so we have that number, right. And the IRS has the income information, presumably, for these people. So where’s the challenge in making that that calculation? Like why why do you think there’s a need for this application? And why can’t the Department of Education say, hey, IRS, you know, give us this income information for these borrowers that we know borrowed for their education?

  Brian Backstrom

  I suppose that could be done. I think like any application program, this is you an opt in, if you want relief, you have to ask for the relief. It’s automatically being provided for those people who, in a sense, already have provided their information. And that’s those who have enrolled in the Income Based Repayment Program. And that’s not burden free, that those individuals have to provide every single year verification of their employment and their income to the Department of Education to get, maintain their membership, if you will, in this type of repayment program. So this is it’s never been an automated process, where you know, they can they do the matching of your of your file filing with your student loan payment and talk to your student loan servicer to see how your monthly payments are going. So I think that it’s it’s reasonable to say that an application process should happen. I think one of the better dream scenarios would be if the federal government took the approach that all students graduating would automatically be enrolled in an income based program from the beginning. Why not provide this equalized debt burden approach to everybody? So you don’t have an application process? That’s just the default. If they had done that, the Department of Education would automatically have that information already, and automatic benefits would be already flowing out the door.

  Joel Tirado

  So this seems like a natural segue into what happens for future borrowers. And, you know, we’ve, we see the numbers almost to true maybe it’s reached $2 trillion that is owed in some by borrowers in the US, student borrowers in the US. Does this relief program, change things for future borrowers? Or maybe another way to ask that question is how do we avoid finding ourselves in the same circumstances we’re in now in the future?

  Brian Backstrom

  I think that’s a great question. And a lot of the focus has been on the $10,000. wiping out of student debt. And a lot of focus with that has been that it’s a one time gift, it really doesn’t do anything to change the structure of higher education cost, it doesn’t change the structure of students needing to incur debt to get through college. I think one of the things that we’ve seen here with the administration’s new plan is the creation of that new income based repayment program, that’s a long term fix for a program that has been plagued with problems. And it’s also made it more affordable. So instantly, there, we do have one element of long term approach to reducing student loan debt. For kids who go to and through college. There’s a whole bunch of other problems that never got touched. college affordability, there’s no cap on, on increasing college costs, they could double tomorrow, and we’d have just the biggest mess as ever. I think that we need to look at cost control measures for higher education, I think we need to increase access programs. And I think we need to incentivize personal savings and investment programs to get more and more people planning for those college costs as they come. None of that was included in this package. Now, I can’t say, you know, it doesn’t provide benefit. If we’re talking anywhere from half a trillion to a trillion dollars in benefit, there is benefit coming through this. But I think we need to look at long term fixes. So we don’t find ourselves in this student debt mess that we’re in right now.

  Joel Tirado

  Brian, we’ve covered the different elements of this plan and the challenges of calculating exactly how much relief will be flowing to New Yorkers and and individuals across the nation. Is there anything else that we should talk about in this moment of our new relationship to student debt as a nation?

  Brian Backstrom

  I think one of the things that’s intriguing is looking at some of the private sector partnerships that are going on. Having businesses reach directly into the schools and try to train workers for the type of skills and professionals that they want. And then in exchange, paying a portion of either their costs or their debt upon graduation, if they come to work for that particular company. Very intriguing arrangements have sort of bypasses all the government intervention in this might make students think a little too much about where they want to end up in the professional world rather than exploring all different options through academia, but it’s, it’s creative. And I think that there are opportunities like that that are being created because of this crisis. I wish it wouldn’t have happened in the first place, of course. But I do think that looking at states who are creating innovative, affordable options, looking at things like the Excelsior Scholarship, which is providing free tuition to the SUNY students of statewide for anyone who wants to sign up for that option. These are ways around incurring debt, the best way to reduce your student loan debt burden is to not incur it in the first place.

  Joel Tirado

  Well, I think that’s a nice way to conclude this conversation. So Brian, thank you for coming on to tell us about this moment and, and the forgiveness program. And we look forward to having you back on the show as new developments unfold.

  Brian Backstrom

  Thanks a lot for having me. There’s gonna be a lot to talk about from now until year’s end, and I hope that we see a lot of benefits flowing to New York from the program

  Alexander Morse

  Thanks again to Brian Backstrom, Director of Education Policy Studies at the Rockefeller Institute of Government for stopping by to talk about the recent student debt relief package, and a special thanks to Joel Tirado for helping fill in as guest host. Brian’s student loan debt research is available on our Podcast page on the Rockefeller Institute website. Be sure to check them out for an in-depth analysis on the student debt crisis and possible policy solutions.

  If you liked this episode, please rate, subscribe, and share. It will help others find the podcast and help us deliver the latest in public policy research. All of our episodes are available for free wherever you stream your podcasts. Transcripts are available on our website. Special thanks to the Rockefeller Institute staff Heather Trela and Laura Schultz for their contributions to this episode. Thanks for listening. I’m Alex Morse. Until next time.

  Policy Outsider is presented by the Rockefeller Institute of Government, the public policy research arm of the State University of New York. The Institute conducts cutting-edge, nonpartisan public policy research and analysis to inform lasting solutions to the challenges facing New York State and the nation. Learn more at rockinst.org or by following @RockefellerInst on social media. Have a question, comment, or idea? Email us at [email protected].

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