Key Points and Takeaway

1. Biden forgave $10k of student loan debt ($20k for Pell Grant Recipients) for individuals with income below $125,000 ($250,000 for married couples). Current students are also eligible.
2. Moratorium on payments will end and payments shall resume on January 1, 2023
3. Information on how to claim student loan relief will be coming soon. Sign up here to be notified when information is available.
4. Student loan forgiveness is not treated as taxable income for federal income tax purposes.
5. The loan forgiveness may be challenged in court as unconstitutional.

Overview

On August 24, 2022, something rare happened: a politician (partially) kept a campaign promise. Biden announced $10,000 ($20,000 for Pell Grant recipients) of student loan forgiveness for those debtors earning less than $125,000 of annual income. Moreover, he announced that student loan payments would remain paused until December 31, 2022; however, he specified that this would be the “final time” the deadline is extended. So the moratorium on student loan payments will end and payments shall resume on January 1, 2023.

Previously, I wrote about how someone could take advantage of the pause in student loans using high-yield savings accounts or paying down other debts. Now, if you were able to take advantage of this pause, not only are your loans likely $10,000-$20,000 less, you may have a decent chunk of money set aside to pay down (or off) your remaining loans or spend on something nice. However, not everyone is pleased with the new policy. I’ll breakdown the new policy, the benefits, and the concerns.

The Breakdown of Student Loan Forgiveness

In the White House’s official statement for the student loan forgiveness, President Biden’s three-part plan was explained in detail. The statement focuses on the past and future of student loans and cost of higher education.

• The Past – how we got here

Starting in 1980, the cost of private and public four-year college has nearly tripled, accounting for inflation, according to the College Board. Moreover, federal support has not kept pace as Pell grants, which once paid for around 80% of the cost of a four-year public degree, now only covers a third, according to the Center on Budget and Policy Priorities. Unsurprisingly, most students today need to take out student loans to get a college degree. Today, the typical undergraduate student with loans has around $25,000 in student loan debt, according to the Department of Education.

The problem with this federal student loan debt is that it burdens low and middle income households. Further, other financial goals of these households are affected by large amounts of student loan debt: rising cost of homes and rent, saving money for retirement, and small business entrepreneurship. Low income households are more affected by these loan payments because many are in default and some were unable to complete their degree because of the cost of attendance.

Since March 2020, with the passage of the Cares Act, payments on federal student loans were paused. Originally, this pause was set to end in September 2020. However, former President Trump extended it twice and President Biden has now extended it five times. This current extension was strongly indicated to be the final extension. “Borrowers should expect to resume payment in January 2023,” according to the White House fact sheet.

• The Future – where are we heading

President Biden claims his three-part plan helps working-class families. Biden used the COVID-19 pandemic as the opportunity to offer (1) targeted debt relief, (2) cut monthly undergraduate loan payment amounts and fix the Public Service Loan Forgiveness (PLIF) program, and (3) reduce the cost of college and review price hikes.

1) Targeted Debt Relief

Individuals with income less than $125,000 ($250,000 for married couples) will be eligible for $10,000 of student loan forgiveness. Further, Pell Grant recipients will be eligible for $20,000 of loan forgiveness. 93% of individuals who have received a Pell Grant came from families earning less than $60,000 per year. Pell Grant recipients account for 60% of those with student loans, and, according to the Department of Education, that means around 27 million borrowers will be eligible for the $20,000 of debt relief.

Current students can be eligible for this debt relief as well; however, if they are claimed as a dependent, then their parents income will be used to determine if they qualify.

Overall, if everyone eligible claims student loan forgiveness then, according to the White House, 43 million borrowers will receive relief, 90% of student loan forgiveness will go to those earning less than $75,000 per year, and will help borrowers of all ages (more than one third are over 40 and 5% are senior citizens).

The Department of Education plans to have the application for debt relief available before December 31, 2022, when the moratorium on student loan payments ends. For 8 million people, they may be able to automatically receive relief because their income data is already available.

2) Reduce monthly payments and fix PLIF

This policy is modifying student loan repayment plans in an attempt to help low-income and middle-income borrowers to have a more manageable monthly payment. The Department of Education created income-based repayment plans that cap payments based on a percentage the borrower’s discretionary income. Currently, these plans cancel any remaining debt after 20 years of payments; however, these payments are complex and not everyone qualifies.

To remedy these income-based repayment plans, the Department of Education is proposing the following:

• For undergraduate loans, payment is reduced from 10% to 5% of discretionary income.
• Non-discretionary income, which is protected from repayment, is raised to 225% of federal poverty level. This is roughly equivalent to a $15 minimum wage. Meaning anyone earning below that level will have a $0 monthly payment.
• Loan balances are now forgiven after 10 years of payments, rather than 20 years, for balances of $12,000 or less. According to government estimates, almost all community college borrowers will be free of student loan debt in 10 years.
• So long as a borrower makes monthly payments for income-based repayment plans, the loan balance shall not grow.

Beginning in 2023, borrowers will be able to grant the Department of Education permission to automatically pull their income information annually, to avoid the need to constantly recertify their income.

Additionally, the PLIF program that is meant to forgive student loans of borrowers working in public service, will be repaired so that eligible borrowers will have their debt forgiven. Borrowers who qualify for the PLIF program include borrowers who serve or have served at non-profits, in the military, or in federal, state, tribal, or local government for 10 or more years. For those who served less than 10 years, they can more easily get credit towards their eventual debt forgiveness, even if they had been told previously that they had the wrong loan type.

Further, regulations have been proposed to make the PLIF function more effectively moving forward. Additionally, more types of payments qualify for PLSF, including partial, lump sum, and late payments. Also, these changes allow for certain deferments and forbearances to count toward PLSF. Rules for non-tenured instructors at colleges have been modified to make it easier to calculate full-time employment. The White House launched a website to assist borrowers in certain sectors become aware of the temporary changes.

3) Reduce cost of college

An entire generation is now saddled with unsustainable debt in exchange for an attempt at least at a college degree. The burden is so heavy that even if you graduate you may not have access to the middle-class life that the college degree once provided.

President Biden

As part of this forgiveness, President Biden also increased the maximum Pell Grant and provided $40 billion to schools for emergency student financial aid. The Department of Education has strengthened student loan accountability and re-established the enforcement unit of the Office of Federal Student Aid to hold accreditors’ accountable. Recently, the accreditor that oversaw the for-profit school scandal has had its authorization withdrawn. Moreover, career programs will be held accountable for leaving graduates with loans they cannot repay.

Moving forward the Department of Education claims it will take action to hold colleges accountable for the student loan crises. These actions include publishing a watch list of programs with the highest debt levels to help students avoid these programs and requesting institutional improvement plans for the worst offenders on how they intend to bring down their students’ debt levels.

Benefits

Obviously, for individuals with student loan debt the largest benefit has been the moratorium on student loan payments from March of 2020 and extending through December 31, 2022. Over two and a half years of no payments or interest has provided numerous people with the opportunity to save money, pay off other debt, and improve their situation. Others, as I recommended, have set money aside in high-yield savings accounts or paid down other debt while waiting to see if debt forgiveness would happen.

Now debt forgiveness is here, and most of those those with federal student loan debt will receive $10,000 or $20,000 of debt relief, which will wipe out many people’s debt entirely. Those that have money set aside can pay down their remaining balances significantly, if not entirely, before payments restart in January.

Moreover, the new policy claims to repair the existing systems that have been broken or insufficient, such as the PLSF and Pell Grants. To improve college education options, the Department of Education started implementing policies to help students avoid high debt situations and to hold schools accountable for rapid increases in costs of schooling.

Between the moratorium, debt forgiveness, and repairs to the system, millions of those in student loan debt have a path forward.

For a macroeconomic impact, re-imposing student loan payments in January will have a deflationary impact on the economy, whereas some are concerned about the inflationary impact of the debt forgiveness.

Concerns and Criticism

There are many concerns and criticisms of the student loan forgiveness from both sides of the political aisle.

Many on the left are disappointed that President Biden did not fulfill his campaign promise of forgiving all student loan debts. Elizabeth Warren, a Democratic senator from Massachusetts, and other members of the party wanted the President to forgive $50,000 in debt.

Others point out two glaring issues with the policy. First, it does nothing for individuals who do not have student loan debt, either because they took jobs that do not require college degrees or they already paid off the cost of their education.

Second , this does not solve the student debt issue moving forward, it delays the inevitable choice lawmakers need to make for how to handle the situation, if they choose to at all.

Another major concern is surrounding the current inflation issue. Recently, the government passed the Inflation Reduction Act purportedly to help combat this record inflation. Now, some policy directors, such as Marc Goldwein of the Committee for a Responsible Federal Budget, claims this debt forgiveness will eliminate the deflationary impact of the Inflation Reduction Act.

Finally, there are legal challenges to the loan forgiveness policy. The Biden administration spent long time trying to determine if he had the authority to unilaterally forgive student loans. Last year, the Speaker of the House, Nancy Pelosi, stated that she did not believe he had the authority to forgive student loans without Congress.

Eventually, the administration justified the loan forgiveness through the 2003 HEROES act. The legislation permitted the Secretary of Education to waive or modify rules related to student financial assistance during crises, such as times of war, military operation, or other national emergency. The Secretary can act “as may be necessary to ensure that affected individuals are not placed in a worse position financially in relation to that financial assistance because of their status as affected individuals.”

Here, the administration is using COVID-19 as the national emergency so that the “affected individuals” are effectively all citizens. The counterargument is that the purpose of the 2003 HEROES act was not intended to affect all citizens, but rather individuals who have “suffered direct economic hardship as a direct result of a war or other military action or national emergency.”

Conclusion

If the policy is not overturned from legal challenges to its foundation, this can create an amazing opportunity for those burdened with debt to improve their lives. Reinstating student loan payments, unless they are extended again, will help offset inflationary concerns. Further, taking any action to repair the higher education system and costs may lead to avoiding this issue more in the future, but this alone does not fix the issue.

What do you think?

Citations:

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