What canceling student loan debt really means

February 16, 2022, 4:00 PM UTC

On the campaign trail in 2020, President Joe Biden promised to forgive $10,000 in student loan debt for every federal student loan borrower

That hasn’t happened yet. While Biden has issued targeted forgiveness rounds before, including for disabled and defrauded borrowers, he has yet to announce anything close to that lofty campaign promise. Indeed, the $15 billion in student loan forgiveness the Biden administration issued last year only amounts to less than 1% of the collective $1.6 trillion federal student loan debt.

But that doesn’t mean broad forgiveness will never come. Democratic lawmakers are getting more vocal as they push for Biden to make a blanket student loan debt cancellation. And the pressure isn’t just coming from the young progressive wing of the party: Senate Majority Leader Chuck Schumer has repeatedly said that he wants Biden to cancel $50,000 per student borrower through an executive action.

“Millions of student loan borrowers would suddenly have their lives impacted in a very serious way—a very positive way,” Andrew Pentis, a certified student loan counselor with Student Loan Hero, tells Fortune about potential debt cancellation. He added the positive impacts wouldn’t be just financial. “If they were feeling burdened or brought down by their debt, that’s a feeling that would go away or at least dissipate over time.”

But what does all this student loan forgiveness talk actually mean for borrowers, especially now that loan repayments paused during the pandemic are expected to begin again on May 1?  

To help borrowers prepare, Fortune set out to answer what student loan forgiveness might look like on a grand scale, and where Biden currently stands on the issue.

What does it really mean to cancel student loan debt?

It’s important to keep in mind that the government can only cancel federal loans. But most borrowers hold both federal and private student loans. 

Private student loans are held by private banks, and there’s no real incentive or reason for those companies to cancel out those loans. They’d be losing out on that money and all the interest they expect to make on those loans over the next several years. Plus, the federal government can’t force banks to forgive private student loans. 

For federal student loans, the government acts as the lender. If federal student loans held by the U.S. Department of Education are canceled, “the loan balances get reduced or set to zero, depending on the amount of debt and the amount of loan forgiveness,” explains Mark Kantrowitz, a federal student loan expert and author of How to Appeal for More College Financial Aid

Federal student loans come from the Department of the Treasury but are overseen by the Department of Education. Servicing companies such as FedLoan and Nelnet handle the billing and collections part of the student loan payment process. So while canceling student loans would be of help to millions of borrowers, the federal government would still be out potentially billions of dollars—or even more than $1 trillion if all debt were to be canceled.

If federal student loans were to be canceled outright on a large scale, it would cost the government that amount—plus the interest it would lose on future payments. Federal student loan debt currently stands at $1.6 trillion. Canceling up to $50,000 of debt per borrower would cost around $950 billion, and canceling up to $10,000 would cost roughly $245 billion, according to the Committee for a Responsible Budget. In 2021, the federal government’s entire budget was $6.82 trillion. 

“The federal government would still be paying interest on the U.S. Treasuries that were issued to provide funding to make the loans and would still be repaying the face value of the Treasuries as they are redeemed,” Kantrowitz adds. “So, contrary to assertions made that it wouldn’t cost the government anything, there’s a real cost.”

I’ve heard that loans may be canceled, forgiven, or discharged. Does that all mean the same thing?

“Canceled,” “forgiven,” and “discharged” have been used interchangeably to mean that the borrower’s loan goes away depending on the amount that’s forgiven. 

Technically, though, loan forgiveness refers to having your loans wiped out through a specific government program, such as the Public Service Loan Forgiveness Program. Under PSLF, borrowers who have worked in public service for 10 years and made 120 qualifying payments would have their remaining balance forgiven, or erased. 

This is slightly different from loan discharges, Robert Farrington, founder of The College Investor, told Fortune. Discharges are typically issued for a specific reason, such as death, disability, or fraud. 

The “hot” term right now for wiping out student loans, though, is “cancellation,” brought on by the Cancel Student Loan Debt movement. Cancellations are issued by the federal government and typically pertain to a specific group of borrowers. To cancel debt simply means that payments no longer need to be made on the loan. Top Democrats and other student debt cancellation advocates are pushing for the government to wipe out between $10,000 and $50,000 of borrowers’ debt regardless of their job type, income status, or other factors.

But while canceling tens of thousands of dollars in student loan debt per borrower would undoubtedly help millions of people, debt forgiveness on its own won’t solve the larger issue of higher education affordability, Farrington argues.

“Without higher education reform, simply forgiving an arbitrary amount of student loan debt would simply kick the can down the road,” Farrington says. “We cannot deny that it would help some individuals today, but estimates say that $10,000 in loan forgiveness would get us back to this same level of debt within 10 years; $50,000 would put us back here in about 15 years. It does help some individuals, but I don’t think it’s great policy by itself.”

What’s the difference between forgiveness and forbearance?

Payments on federal student loans have been put on pause for nearly two years during the COVID-19 pandemic, in a process called forbearance. Student loan borrowers have had the choice of whether to hold off paying their debt or to take advantage of the 0% interest rate while the loans are paused, continuing to pay down their principal amount. 

Forbearance first started in March 2020 as the result of the CARES Act passed when the pandemic first hit the U.S., and has been extended several times since. Payments are set to resume on May 1, though, leaving many borrowers to take a hard look at their financial situation after a two-year reprieve. In fact, some borrowers are holding on to the idea that their federal student loan debt could ultimately be “canceled,” meaning completely or partially wiped out. That could be largely due to the fact that Biden campaigned on forgiving student debt for every borrower, which hasn’t yet happened.

What does Biden think about student loan forgiveness? And can he make it happen?

During Biden’s first year in office, he announced targeted rounds of student loan forgiveness for specific groups of borrowers, but he hasn’t done anything that would cancel loans en masse. 

That’s been frustrating to borrowers and advocates who are under the impression that Biden ran on the “promise” to cancel federal student loan debt. 

“We should forgive a minimum of $10,000 [per] person of federal student loans, as proposed by Senator Warren and colleagues,” Biden tweeted on March 22, 2020. “Young people and other student debt holders bore the brunt of the last crisis. It shouldn’t happen again.”

In the roughly 22 months since that tweet, though, it’s become more apparent that Biden isn’t prepared to use an executive order to cancel $10,000—or up to $50,000 like some top Democrats are proposing—in federal student loan debt. Bottom line is that Biden does not believe that he has the authority to cancel federal student loan debt by executive order, but some Democratic lawmakers do.

The Biden administration was expected to release a memo in the spring of 2021 showing whether or not Biden has the legal authority to cancel student loan debt. The full memo still hasn’t been released, but a heavily redacted version exists, The New Yorker reported in October. It’s notable that the White House had the memo for more than six months without releasing any information to the public, because it shows that the administration is holding on to information about Biden’s authority to cancel student debt.

Recently, Biden has actively avoided answering questions about canceling student debt en masse. During a press conference in mid-January, he was asked, “You campaigned on canceling $10,000 in student loans. Do you still plan to do so, and when?” He ignored the question. 

And during a CNN town hall on Feb. 17, 2021, Biden said he objected to forgiving student loan debt for borrowers who went to “elite” private colleges including Harvard, Yale, and the University of Pennsylvania. He still held this opinion in May 2021.

“The idea that you go to [the University of Pennsylvania] and you’re paying a total of 70,000 bucks a year and the public should pay for that? I don’t agree,” he told the New York Times

So should I keep making payments on my student loans or are they getting forgiven?

The idea of mass federal student loan debt forgiveness is completely hypothetical at this point, says Leslie Tayne, the founder and managing director of Tayne Law Group.

“One should certainly prepare to pay their loans because that’s what’s in reality now,” she tells Fortune. “I want people to plan for non-hypotheticals. Hypotheticals are hard to talk about because they could go in a lot of different directions. There could be caveats and other nuances. Nothing is straight up.”

The heat is on, though, from top Democrats including Schumer, Warren, and Rep. Alexandria Ocasio-Cortez to cancel student loan debt ahead of the May 1 forbearance end

“Pausing student loans isn’t good enough,” Schumer said during the Cancel Student Debt town hall hosted by NextGen America, the Student Debt Crisis Center, Public Citizen, and MoveOn last week. “We need student debt erased—plain and simple.” Biden can, Schumer argued, cancel student debt with the “flick of a pen,” and the act doesn’t require any legislation.

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