What $20,000 of student-loan forgiveness means

In the latest issue of Personal Finance Insider: Pell Grant recipients will get $20,000 of student-loan forgiveness under Biden's plan.

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Here's what: Biden's student-loan forgiveness plan was more generous than expected

On August 24, President Biden announced his long-awaited plan for student-loan forgiveness: Individual borrowers earning less than $125,000 would receive $10,000 of forgiveness, and students who received Pell Grants (i.e. low-income students demonstrating financial need) would receive an additional $10,000 for a total of up to $20,000 in forgiveness.

This is meaningful. More than 60% of all student-loan borrowers are Pell Grant recipients, according to a White House release, and that percentage is even higher among some students of color: During the 2015-2016 academic year, for example, more than 72% of Black full-time undergrads received a Pell Grant. 

One more stat to drive this home: Among students who received Pell Grants in the 2015-2016 academic year, the average amount borrowed was about $31,200, which means $20,000 of forgiveness will go a long way to reducing that burden.

But don't take my word for it. 

Many Pell Grant recipients are celebrating

Insider contributor Ellie Bozmarova, who, as a Pell Grant recipient, will get $20,000 of loan forgiveness, wrote in an essay that having her debt load reduced now, in her early 30s, will give her time and space to focus on other goals, like homeownership and family planning.

"Broad student-loan forgiveness can change the course of my life, and many people's lives. It can allow us to be free from these loans at a pivotal moment," she wrote.

Writer and student-debt cancellation advocate Sarah Martinez-Shaw, who will have her loans wiped out with $20,000 of forgiveness, said that giving more relief to Pell Grant recipients is an acknowledgment that those students had "fewer privileges and opportunities to begin with than someone who didn't." And, she told me via email, "Selfishly, I'm thrilled and relieved. I'm going to graduate with no debt, of course I feel great about that."

Borrowers celebrated on Twitter, too.

Twitter user @_saraicruz wrote, "Shout out to my fellow 1st generation college students who figured out the FAFSA at 17 and got that Pell Grant!"

"Yo yo yoooooooooooooooooooo let's gooooo (this covers my student loans babay)," wrote podcaster and author Akilah Hughes.

Mic's social media editor, Leo Rocha, wrote, "i have $19,887.15 in student loans and received a pell grant every semester i was in school. this is wiping it all clean. holy shit."

And on and on. 

Is it too much? Not enough? And what's next?

On the other side of this debate are critics who say student-loan borrowers knowingly chose to take out loans to fund their education and should have to pay them back, just like any loan, and they argue that using taxpayer dollars to fund someone else's educational choice is a poor use of money.

But consider the fact that, in the US, one year of tuition at a public, four-year, in-state college costs over $10,000 on average, while college in Denmark and Germany is free, Japan's top university costs less than $5,000 for one year, and Canadian students pay about $6,700 a year on average.

These governments are making an investment in their citizens, and investing in people pays dividends. Loan forgiveness is an investment in everyday people whose debt has held them back. 

At the same time, student-debt cancellation advocates say Biden's decision doesn't go far enough. "I think means testing is wrong for most programs," said Martinez-Shaw. "A lot of people are going to fall through the space between qualifying for the Pell Grant during college and being able to comfortably afford to pay their debt now."

She adds, "I think we owe much more to people who, very often, were talked into crippling debt before they were old enough to rent a car or buy a six-pack."

Plus, many advocates point out that one-time forgiveness does nothing for those coming up right now and future students who will face the same astronomically high tuition costs.

As Martinez-Shaw told me, "Biden could have forgiven 100% of federal loans and as we speak, college freshman are taking out those same loans to pay extremely high tuition." 

— Stephanie Hallett, senior editor of Personal Finance Insider

More on student-loan forgiveness

For many borrowers, $10,000 is just one part of the savings they'll get from student-loan forgiveness

Whether you end up with $10,000 of forgiveness or more, a smaller loan balance means you'll pay substantially less in interest over time.

How Biden's student-loan forgiveness could affect your credit score

A potentially negative impact of forgiveness to consider: When you close an account, you'll reduce the length of your credit history, and this may be particularly problematic if a student loan is one of your oldest accounts.

5 ways to spend your forgiven student loan debt to build wealth and treat yourself

Consider using the freed-up cash to build up an emergency fund or invest in the market. Or, if you've hit your other financial goals, spend some of the money you saved to treat yourself.

Private student loans don't qualify for forgiveness; 3 alternatives to consider if your debt is ineligible

You can't get forgiveness with private student loans, unlike with their federal counterparts. But you may be eligible for state loan assistance or forgiveness programs if you work in a specific profession.

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