President Biden’s long-awaited student-loan relief package is expected to help millions of student borrowers reduce their debt — and it could also have a big impact on the student loan industry.
The Biden package applies to borrowers with federal student loans, which are the vast majority of student loan borrowers. It doesn’t apply to private student loans, which are often offered by banks and refinanced by companies such as SoFi and Laurel Road.
Biden also extended a pause on loan payments, but indicated that repayments on the remaining balances will resume in 2023. That could help lenders like SoFi, since borrowers will have an incentive to refinance active loans — though the date could be pushed back again. SoFi shares rose 4.5% Wednesday on the news.
The package includes the cancellation of $10,000 for people who earn less than $125,000 per year, with another $10,000 possible for those who received Pell Grants for low-income students. The administration extended the pause on student loan repayment until the end of the year, a feature that began in the early part of the COVID-19 pandemic in March 2020 under President Donald Trump and which has since been extended several times.
Also included is a substantial new program that would enable borrowers who are unable to pay back loans with the option to pay a maximum of 5% of their income. Most previous plans had a 10% cap.
“Just based on what we know, this is going to be life-changing relief for millions of people that is going to have massive positive ripple effects across people's financial lives and across communities and across the entire country,” said Ben Kaufman, director of research and investigations at the Student Borrower Protection Center.
Some critics have contended that the relief will benefit high-income earners from elite colleges. But the White House says that 90% of the relief is for borrowers earning less than $75,000 per year. About 60% of borrowers are Pell Grant recipients, so about 27 million people will be eligible for up to $20,000 in debt relief, the White House said.
Companies that refinance student loans such as SoFi could benefit because borrowers have been waiting to see how much of their debt would be canceled, and also because they didn’t have to make any payments, before refinancing. Biden had long floated the idea of student loan cancellation as far back as the 2020 campaign, and some in the Democratic Party had been pushing for a higher figure.
Now that those borrowers know how much it is and whether they qualify, some of them are more likely to refinance now, said Will Sealy, CEO at startup Summer, which helps students manage their student loans.
“What this means going forward also is there will likely be an uptick in applicants for refinancing,” Sealy said, as individuals now seek to switch to a lower interest rate loan.
Many borrowers who had refinanced before Trump instituted the loan pause were higher-income or had a medical, law or business degree, said Sealy. As private borrowers, they wouldn’t qualify for the cancellation. But many of those individuals may not have qualified under Biden’s plan anyway due to income caps.
That should have a big impact, especially for low-income and minority borrowers who often can’t make a dent in their principal. “This is really going to allow the majority of minority borrowers — Black, brown and women borrowers alike — to make progress on their student loans,” said Tony Aguilar, CEO of Chipper, which helps borrowers pay back their student loans. “That was one of the biggest causes of the inequality when it comes to borrowing for college.”
One potential challenge for borrowers is the resumption of repayment, after a long pause during the pandemic. Many younger borrowers have become accustomed to not paying or are worried about now having to soon pay back loans, said Harrison Hochman, CEO of Sparrow, which helps borrowers choose private student loans and refinancings. “Of all age ranges of borrowers that we support, they're the ones most anxious about payment resumption.”
For the loan industry, the repeated pauses in repayment have left the industry in a holding pattern, with federal loan servicers such as Navient, FedLoan and Granite State as well as other lenders pulling out of the business. “In response to the uncertainty, many companies left the student loan industry,” said Hochman, noting that a number of startups are trying to fill that void.
It’s still unclear if Biden will resume repayments at the start of 2023. The issue has become a “bipartisan political Wiffle ball,” with neither party wanting to end the pause, Hochman said.
Borrowers will have to apply for the debt cancellation and show proof of income, which could present complications or delays for some. The White House says the application process will be available before the end of the year.
This is an area where fintech companies could help by streamlining the application process. “What we're doing in student loans is what TurboTax and H&R Block and all of these tax companies have done,” Chipper’s Aguilar said.
