The Biden administration’s plan for student debt forgiveness is a lesson in politics for all involved: Be patient!
For millions of borrowers, however, it’s a stressful lesson in patience.
If you hit the pause button on payments during the pandemic, this issue must surely seem like the pot of water that refuses to boil. Payments on federal student loans were first announced in March of 2020. This can of worms has been kicked down the road six times, with the latest deadline being August 31, 2022 and that deadline could get a boot further into the future.
So, is student loan forgiveness coming … or not?
When Will Biden’s Student Loan Forgiveness Happen?
“If loan forgiveness will happen, it will be announced before the mid-term elections,” said student loan expert and author Mark Kantrowitz, who reasons that debt forgiveness after the midterms doesn’t help at the polls. “So, we should know one way or the other within a few months.”
Kantrowitz also points out the types of student loans included will affect the timing when/if debt forgiveness passes into law.
Not all loan forgiveness is created equal. Or, more importantly to borrowers facing a possible resumption of payments at the end of August, equally expedient.
If loan forgiveness is limited to federally-held student loans, for instance, the implementation period would be much shorter (a month or two, he estimates) than if commercially-held federal student loans are included.
Slowest yet would be private loans.
“The U.S. Department of Education does not have any records of loans made through purely private student loan programs,” Kantrowitz writes.
How Much Student Loan Debt Will Be Forgiven? ($50,000 vs. $10,000)
How soon people can count on a resolution is the most asked question … next to how much student loan forgiveness they can expect?
The number most prominently mentioned is $10,000 worth of forgiveness. Other figures broached include $50,000 and even $100,000. If you’re carrying six-figure student loan debt, the best advice: bet the under.
Biden’s support for student loan forgiveness hasn’t changed, at least publicly. He voiced that support as recently as April when he confirmed consideration of broad federal student debt cancellation.
But he never championed the idea of $50,000 in debt relief embraced by Senate Majority Leader Chuck Schumer (D-NY) for one – probably for good reason.
“Even some Democrats are hesitant to spend a trillion dollars forgiving $50,000 per borrower,” Kantrowitz said. “With Democrats controlling the Senate by the slimmest of margins, every Democrat has a veto. So, if Congress passes legislation to implement forgiveness, it will need to be limited in amount and eligibility.”
In April, NBC News quoted an unnamed Biden aide regarding the President’s stance. That quote: “(The President) basically said: “You’re going to be happy with what I do about student loan debt relief.”
Still, that assurance doesn’t add up to a guarantee, and no timetable was mentioned.
So, taking everything into account, what is the probable outcome?
“Broad student loan forgiveness is more likely to happen now than at any point in the past,” Kantrowitz said. “(With that) $10,000 in loan forgiveness is most likely.”
Eligibility for Biden’s Student Loan Forgiveness
A means test applied to student debt forgiveness would base eligibility on income. In other words, if in applying certain income standards it’s determined you have the ability to pay off your loans, you wouldn’t qualify for forgiveness.
Extending student debt forgiveness to borrowers who most need the relief sounds sensible enough, right?
Not so fast.
There’s a reason why means testing for student debt forgiveness has been called everything from unwieldy to a potential “train wreck.”
“The U.S. Department of Education does not have access to income data,” said Kantrowitz. “Congress would have to pass a law to enable this, or there would have to be an application process, which slows down forgiveness.”
(Yes, apparently it’s possible to slow down student loan forgiveness even more.)
If you’re thinking the IRS would have income data useful for determining student loan forgiveness, you are correct. The agency uses prior-year tax information for benefits tied to income, as was the case with stimulus payments during the pandemic.
Unfortunately – or fortunately depending on your viewpoint – the IRS is prohibited by law from sharing taxpayer information with other agencies.
That brings proof of eligibility into the mix in determining eligibility for debt relief, according to the Education Department. In other words, red tape times five.
The long difficult slog of validating eligibility is only part of the reason for the criticism of student debt forgiveness based on means-testing.
Income Limits for Biden’s Student Loan Forgiveness
Some senior aides in the Biden administration have considered debt relief for anyone who earned less than $125,000-150,000 as individual filers for the previous tax year.
Kantrowitz is not alone in his criticism, taking aim at the ineffectiveness of such a high minimum and by extension the political theatre at the root of it.
“The means testing that has been proposed, an AGI (adjusted gross income) of $150,000 or less, is a joke, as most borrowers will still qualify for forgiveness,” he said.
Is there a better idea?
“A test based on debt-to-income ratios is better targeted but still requires income data,” he said.
Flaws in Biden’s Student Loan Forgiveness Plan
Democrats understandably want to avoid the appearance of giving money away to those who don’t need it. So, what to make of the notion that student debt forgiveness without income consideration would unnecessarily benefit too many high earners? Some believe that’s a fallacy.
Nearly 40% of those holding student debt did not leave college holding a diploma. That means – as Kantrowitz puts it – “they have the debt but not the degree that can help them repay the debt.
“We don’t really have a student loan problem, so much as a college completion problem,” he added. “Undergraduate students who drop out of college are four times more likely to default on their student loans than college graduates.”
Would higher-income families benefit from student debt relief? Surely, some would.
But Progressives argue a bigger percentage of those families qualifying as “higher-income” likely didn’t take out student loans to pay for college in the first place or were able to pay their loans off much more quickly.
According to the bi-monthly The American Prospect, student loan forgiveness of $10,000 per borrower would “reduce the share of student debt in the lowest 20% of wealth holders by 20%” and wouldn’t reduce the share in the upper 10% at all.
Another thought: Kantrowitz points out the impact that $10,000 per borrower forgiveness would carry.
“Limiting eligibility to borrowers who owe $10,000 or less, as opposed to all borrowers, will still erase the student loan debt of a third of borrowers, but cut the cost to just $75 billion, which is much less than a trillion,” he said.
Can Biden Pass Student Loan Forgiveness by Executive Order?
Nothing is likely coming at the stroke of a Presidential pen.
You may have heard that Republicans and Democrats don’t line up on some issues. Add student debt forgiveness to a list that could stretch coast-to-coast. And back again!
Republicans introduced a bill in late April called the Stop Reckless Student Loan Actions Act of 2022, a title that even borrowers drowning in debt should be able to appreciate for its clarity if not its intent.
The bill’s sponsors call Biden’s continued pause on student repayment almost two years after the moratorium began “untargeted” and “unnecessary.” They argue student debt cancellation would further add to the national debt and believe debt forgiveness without careful consideration of income would benefit many families that can afford to pay off loans.
Some think the Stop Reckless Student Loan Actions Act of 2022 bill is a pre-emptive strike born of Republican concerns that Biden could exercise his authority to implement student debt relief by executive order.
There is a difference of opinion among student debt and legal experts. Kantrowitz, for one, doesn’t consider executive order an option.
He believes Biden doesn’t have the legal authority to implement student debt forgiveness, that only Congress has the “power of the purse.” Biden himself supports Congressional approval.
What Borrowers Should Do in the Interim
Let’s assume the Biden administration delivers on the promise of student debt relief, triggering the end of the repayment pause on August 31.
Hopefully, those with student debt didn’t spend like crazy during the moratorium in anticipation of getting $50,000 forgiven. It’s far more likely that $10,000 in student debt forgiveness is in the offing.
If it’s $10,000, one-third of borrowers would have their federal student loans completely erased, meaning two-thirds will still have to make payments when the repayment period begins anew.
In April, Biden suggested borrowers should prepare for repayment. Kantrowitz offers specific advice here for the various contingencies borrowers might consider.
In general, he says borrowers should consider saving the money they would otherwise be paying on their student loans so if there is still some debt left, they can make a lump sum payment when repayment starts again.
“The savings can also be used to ease them back into repayment,” said Kantrowitz “Or, they could use it to build or bulk up an emergency fund. Or, pay off higher-interest debt, such as credit card debt.”
Is there anything else they can do?
“Borrowers should sign up for autopay, where the monthly loan payments are transferred from their bank account to the loan servicer, since this reduces the likelihood of being late with a payment,” he said. “It also provides them with a slight interest rate reduction (e.g. 0.25% percentage points). They should also claim the federal student loan interest deduction on their federal income tax returns.”
Rising interest rates add urgency for some borrowers waiting for a resolution.
“Borrowers who want to refinance to get a lower interest rate have to trade off waiting for Godot against saving money through a lower interest rate,” said Kantrowitz. “It is a difficult decision.”
Robert Shaw writes about finding ways to solve financial problems like keeping up with mortgage payments, paying off credit card debt and avoiding bankruptcy for Debt.org. During his 45-year career in journalism, Robert was a columnist for the Cleveland Plain Dealer before transitioning to television sports commentary at WKYC.
- Dayen, D. (2022, May 5) Means-Testing Student Debt Relief: Big Hassle, No Results. Retrieved from: https://prospect.org/education/means-testing-student-debt-relief-big-hassle-no-results/
- Kapur, S. Tsirkin, J. Talbot, H. (2022, April 27) Biden considers forgiving some student debt as GOP pushes new bill to stop him. Retrieved from https://www.nbcnews.com/politics/biden-considers-forgiving-student-debt-gop-pushes-new-bill-stop-rcna26292
- Stratford, M. (2022, May 13) Harder than it sounds: Income-targeted student loan forgiveness invites a “train wreck.” Retrieved from https://www.politico.com/news/2022/05/12/bidens-income-cap-student-loan-forgiveness-nightmare-implement-00031746
- Kantrowitz, M. (2022, June 8) What’s the Current State of Student Loan Forgiveness? Retrieved from https://www.savingforcollege.com/article/whats-the-current-state-of-student-loan-forgiveness
- Minsky, A. (2022, June 20) ‘Yes’ – Biden Will Soon Decide On Student Loan Relief And Gas Tax Holiday To Combat Inflation. Retrieved from https://www.forbes.com/sites/adamminsky/2022/06/20/yes--biden-will-soon-decide-on-student-loan-relief-and-gas-tax-holiday-to-combat-inflation/?sh=56be5a563199