How Americans are preparing for life without student debt

As student borrowers get set to apply for federal loan forgiveness, some of them are also considering homeownership and other major milestones as they embark on new lives without the specter of debt hanging over them. 

Of the 43 million Americans with federal student loans, 95 percent are expected to qualify for some forgiveness under a plan announced by President Joe Biden in August.

The debt relief could be life-altering. Christopher Kea, a 29-year-old analyst for a software company in Austin, graduated from the University of Texas in 2015 with about $26,000 in student loans. He still owes about $8,900. He estimates he'll get that forgiven and also receive a $2,700 refund for payments made during the pandemic pause. That will enable him to buy a home — a longtime goal of his. 

"Having the debt forgiven, that's likely going to increase my credit score and free up funds for me for the down payment," he said. "I'm so grateful for the loan forgiveness."

The application process will begin later this month and close at the end of 2023. It will take at least four to six weeks to process applications, the Department of Education has said.

For those with incomes less than $125,000 (or $250,000 for married couples), the Biden plan calls for cancellation of up to $20,000 of student debt for Pell Grant recipients and up to $10,000 for non-Pell Grant recipients. 

More than half of student debt holders have balances under $20,000, according to a Washington Post analysis. A Congressional Budget Office report estimated that as many as 45% of people who made less than the income cap would have their loan balance wiped clean, while the Federal Reserve Bank of New York placed that number at 40.5% of people with federal loans. The New York Fed also estimated that the amount of federal student debt remaining would decline by 31%.

There would still be more than $1 trillion in outstanding student debt, disproportionately held by teachers, doctors and other professionals with graduate degrees, as well as Black, Hispanic and female borrowers. Plus, legal challenges could slow down or complicate the entire process. 

Estimates of who would benefit also came before the Biden administration announced on Sept. 29 that some federally backed, privately held loans — including some Federal Family Education Loans or debt acquired through the Federal Perkins Loan Program — would no longer be covered by the forgiveness program if borrowers had not yet applied to have the Department of Education take control of those loans. It's not clear how many people this will affect. Some borrowers who hold a mix of federal and private loans could still see a portion of their debt forgiven.

Tax

How student loan relief can turbocharge retirement savings

August 30, 2022 10:47 AM

Long-term benefits
Still, when the dust settles, millions of people will be free of their student loans, some after decades of payments. A 2019 paper from the National Bureau of Economic Research found that a cohort of student loan borrowers whose private loans were discharged had experienced an initial bump in wealth from reduced liabilities as well as long-term benefits to their careers and lifestyles. After National Collegiate Trust, a private loan holder, couldn't prove it owned some loans on which it had sought to collect repayment, borrowers whose loans were cancelled were more mobile  — geographically and financially — than their counterparts who still owed money. 

People took greater risks with their careers following their windfall, which averaged $7,900 per person. Three years after their loans were forgiven, they had increased their salaries by $3,000. They were also less likely to default on credit card or mortgage debt, said Marco Di Maggio, a professor at Harvard Business School and one of the researchers who wrote the paper. This made them less risky to other companies overall.

"That's another benefit to society that goes above and beyond the one-to-one transfer between the government and the borrowers," said Di Maggio.

The pandemic-era forbearance initiated by the Trump administration in March 2020 has served as an indicator of what happens when student loans are forgiven. Borrowers whose repayments were frozen said taking vacations, buying a home and getting married were easier without student loan payments looming over them every month. 

A 2019 survey by the Federal Reserve found that borrowers typically spent between $200 and $299 each month paying back their student loans, and 42 percent of respondents with student loans said they were unable to pay all their monthly expenses. A survey released in April by Bankrate found that 60% of respondents had put off some major financial decisions as a result of their student loans.

'Feeling of relief'
For Matt Cordeiro in Brooklyn, the forgiveness means he'll be able to start planning to have kids. The 32-year-old political strategist  graduated from Rutgers University with about $16,000 in student loans, of which he's paid about $9,000. After his loans are forgiven, he estimates he'll have an extra $165 a month to put toward savings. 

"It wasn't clear how long the payments were going to be postponed, so to not have to pay it back is very exciting," he said. "It's a feeling of relief."

Erika Eringis graduated from Loyola University in Chicago in 2019 with about $12,000 in student loans and paid the debt down to about $9,000 before the forgiveness plan was announced. She said learning about Biden's plan was like stumbling across free money. 

Now, the 25-year-old, who works in event production, is planning to save for a down payment on a condo. Homeownership is something "I never expected to do," she said. But she worries about her friends who have far more debt than she does. 

"I'm thankful for myself, but still I know more could have been done for other people," Eringis said. "Most people don't just have $10,000 in loans."