President Joe Biden’s decision to forgive a portion of student loan debt couldn’t have come sooner for most borrowers.
About 48 million student loan borrowers owe a cumulative $1.75 trillion in debt, according to a recent analysis of Federal Reserve data. Pell Grants have not kept pace with the rising cost of college, leaving many Americans saddled with student loan debt that can contribute to low credit scores and prevent borrowers from purchasing homes or starting a business.
Biden’s plan, announced on Wednesday, will forgive up to $10,000 in federally held student loans for borrowers who earn under $125,000 per year. For Pell Grant recipients, up to $20,000 will be forgiven.
Additionally, the Department of Education is proposing a new income-driven repayment plan that caps monthly payments for undergraduate loans at 5 percent of a borrower’s discretionary income. This halves the lowest monthly income cap currently offered by income-driven repayment (IDR) plans.
The White House also paused payment and interest accrual on federally held student loans until the end of the year. According to the announcement, this will be the last extension of the student loan pause that first took effect at the beginning of the Covid-19 pandemic in March of 2020.
The Department of Education plans to have an application process set up for borrowers to claim relief by the end of the year at the latest, according to the White House. Nearly eight million borrowers may be eligible to receive relief automatically because their income data is already available to the Department of Education.
In the wake of this announcement, borrowers will likely seek guidance about the application process and other student loan assistance programs that are available. Built In spoke with three fintech executives in the student loan space to gauge the impact of the loan forgiveness program, what it means for their business and how they plan to help customers navigate these changes.
Miranda Perez contributed reporting to this article.
NYC fintech Summer is a developer of debt management software used by individuals, employers and financial institutions to tackle borrowers’ student loan debt. Founded in 2017, the certified B Corporation has helped thousands of borrowers save an average of $52,000 by enrolling them in a range of assistance programs like IDR and Public Service Loan Forgiveness.
Summer co-founder and CEO Will Sealy told Built In he was thrilled that Biden made good on his promise to provide relief to student loan borrowers. Through his work with Summer, Sealy said he has seen firsthand how the cost of student loan debt has held borrowers back from homeownership, family planning and other milestones in life.
“This relief effort will go a long way to helping an entire generation that started the race a mile back, allowing them to catch up to prior generations whose college costs were a fraction of what they are today,” Sealy said via email.
Summer has already received a ton of questions from borrowers and their employers about how to effectively manage their student loans and when to expect changes, Sealy said. The day after the announcement, the company announced a Forgiveness Eligibility Tool that determines whether borrowers are eligible for student loan forgiveness. It also determines borrowers’ eligibility for IDR plans.
While Sealy applauds the loan forgiveness plan and the new IDR plan, he said new initiatives can create confusion for borrowers trying to navigate an already complicated repayment process. He said Summer’s software can help guide borrowers through this process, ensuring they make the best decision for their unique situation.
Founded in 2008, Chicago-based Moneythink started out with a mission to help younger generations make better informed financial decisions. Over time, it evolved into a platform that helps historically marginalized students financially plan for college.
On Moneythink’s DecidED platform, students have free access to gather data-based insights on which financial tools are available to them to pay for college. The company offers information on how to navigate financial aid, loans and work-study opportunities that students can use to fund their matriculation.
When asked about the company’s reaction to Biden’s decision, Moneythink CEO Josh Lachs applauded the effort but urges that more can be done for those who have borrowed from private institutions.
“Because this forgiveness doesn’t cover all types of loans, it falls short of providing needed relief to countless other borrowers — many of whom took out large amounts of private loans,” Lachs told Built In via email. “More importantly, this does not get at the root problem of increasing college costs and barriers in access to affordable, high-quality education that current and future students face.”
Looking forward, Lachs said Moneythink will stick true to its mission of making the process of paying for college easier for students to understand.
MPOWER’s Director of Corporate Strategy Sasha Ramani shares similar sentiments to Lachs about the limitations behind Biden’s student loan forgiveness decision. Founded in 2014, MPOWER helps students gain scholarships and loans that don’t require a co-signer. A large portion of the students MPOWER works with are DACA, refugee and international students.
“It’s important to clarify that the Biden administration’s policy only affects recipients of federal student loans, i.e. those provided by the U.S. government,” Ramani told Built In. “International and DACA students tend to be ineligible for federal student loans, except under some very special circumstances. [That said], they are likely not affected by President Biden’s debt forgiveness.”
Lack of qualifications for student loans is exactly why MPOWER exists. While Biden’s decision may not impact most of its customer base, the company will continue to use its unique credit model to offer loans to students from 200 countries that “are overlooked by the traditional financial system,” Ramani said.
To determine if a student loan should be granted to someone, MPOWER’s credit model estimates a student’s likelihood of success after graduating college. The company also provides students with career readiness and immigration information.