The presidential election is over. Each state is certifying the official results, but the media announced Joe Biden as the president-elect, having attained the required 270 electoral college votes.
Given the history of Obama-Biden student loan policies, it’s likely that we’ll see progressive changes that could affect the future of student loans.
What could the impact of his policies be on student loans? Here are seven things that a Biden administration may try to achieve, and my thoughts on how that could affect student loan debt.
- 1. Allowing bankruptcy discharge on student loans
- 2. Expanding forgiveness with new forgiveness plans
- 3. Reducing IDR payments
- 4. Increasing Pell Grants
- 5. Eliminating taxes on forgiven loans
- 6. Forgiving undergrad debt and making college free
- 7. Canceling $10,000 to $50,000 for all student borrowers
- Where to go from here
1. Allowing bankruptcy discharge on student loans
It is nearly impossible to eliminate your student loan no matter how bad your financial situation is. Student loans aren’t usually forgiven, even in the event of declaring personal bankruptcy.
“If someone has to declare bankruptcy, student loans have a very low chance of getting forgiven, especially federal student debt,” said Rob Bertman, CFA, CFP®, and senior student loan advisor for Student Loan Planner.
It’s so difficult because student loans are unsecured credit, similar to credit cards. Making a student loan bankruptcy discharge possible would make them high risk.
“Imagine 25% of student debt being discharged out of bankruptcy,” said Bertman. “With that, we could see student loan interest rates go up into the teens, maybe.”
So, even with Biden as president, bankruptcy law likely would not be amended to accommodate student loans. He might try to make it easier to apply for student loan bankruptcy discharge, but it’s nearly impossible to prove, legally, that it’s impossible to repay your student loan.
Little is likely to change on that front.
2. Expanding forgiveness with new forgiveness plans
Joe Biden has talked about coming up with a new plan where you could have student loan forgiveness in five years, where borrowers would receive $10,000 of forgiveness for each year of public service with a limit of $50,000 total by the fifth year.
Democrats in the Senate proposed Public Service Loan Forgiveness (PSLF) having 50% forgiveness at five years, with the other 50% at the ten-year mark. That proposal is more like keeping existing PSLF in place but making it so you could get a lot forgiven after just five years instead of ten.
Now, that would be really impactful.
“If the average borrower has somewhere between $30,000 and $40,000, if they worked in public service for three or four years, they could be debt-free with the $10,000 a year,” said Bertman.
With the current political climate, it is unlikely that Republicans will concede to work with Democrats. Historically, student loan repayment has become more and more accommodative no matter who is in office or which party controls the Senate.
3. Reducing IDR payments
Biden campaigned on reducing income-driven repayment (IDR) plans from 10% of income to 5% of income for 20 years, presumably with no tax bomb.
“I think it’s a starting point for the Biden administration to negotiate, but this is by far the most costly part of the plan because you’re cutting everyone’s payments in half, compared to PAYE or REPAYE, and then you’re also getting rid of the tax bomb,” said Bertman.
This plan also doesn’t solve the problem. It doesn’t make going to school free, and it doesn’t regulate how much schools can charge for tuition. The cost of education could skyrocket if this went through under the proposal.
It’s terrible for people who can’t get access to the amount of federal loans they need, and it also costs the government and taxpayers a substantial amount of money on the back end of it.
Getting rid of the tax bomb alone is probably more likely than getting the 5% payment plus getting rid of the tax bomb.
The Revised Pay As You Earn (REPAYE) program happened because of an executive order. So, Biden could issue a new executive order on IDR plans to make a new plan or attempt to simplify existing plans.
4. Increasing Pell Grants
Biden campaigned on doubling the available Pell grants for schools. Expanding Pell Grants would be an easy win for people without the means to send their kids to college without taking out loans.
“One of the most important things, when people are talking about racial and social equity, is access to education — access to affordable, high-quality education,” said Bertman.
Increasing federal Pell Grants could be a significant advantage for working-class or lower-income families, creating more access to education.
This might not contribute much to student loan reform, but it could be something that the Biden administration would look to implement.
5. Eliminating taxes on forgiven loans
Unless you’re pursuing PSLF, tax law requires borrowers to pay taxes on forgiven student loan debt on 20 or 25-year forgiveness plans.
Both Republican and Democratic members of Congress acknowledge there is a problem with how the law is written. But it is unlikely to be addressed because the issue has become more of a bargaining chip.
The Biden government could influence the IRS to issue a ruling eliminating the tax, but it isn’t likely without legislation.
It’s not something that I think we’ll see over the next four years, although it could happen in 2028 or 2032 when the first waves of taxable forgiveness come in.
6. Forgiving undergrad debt and making college free
The Biden team campaigned on making four-year public universities and community colleges free for $300 billion over ten years. But college is expensive, and my analysis shows they grossly underestimated the price of this plan.
If you made public college free with no regulation or limitations, it would probably cost a trillion dollars (or more) over ten years.
While making college free sounds promising, it’s unlikely to happen.
“If it did, it would give colleges and universities the incentive to all of the sudden jack-up their tuition,” said Bertman. If it’s “free” for borrowers, meaning the government covers the bill, institutions could charge whatever they want.
“I think that sends the wrong message, especially when a lot of these colleges and universities, the major ones, have multi-billion dollar endowment funds that they’re not even using to give people a break during covid,” said Bertman.
7. Canceling $10,000 to $50,000 for all student borrowers
There’s been discussion that Biden could write an executive order and cancel $50,000 of debt for all borrowers. The House Democrats tried to pass a bill in which they wanted to cancel $10,000 of student debt for every American. This was way more expensive than they had anticipated, so scaled it down to $10,000 for struggling borrowers.
There’s a section of the Higher Education Act that grants the Secretary of Education the authority to waive all kinds of different terms for loans. Biden might do a $10,000 cancellation to test whether he has the power to do that.
The $10,000 debt cancellation would be nice for many people with five figures in student debt, but it is challenging to know what might happen because Republicans and Democrats must work together on a solution.
Where to go from here
Regardless of what happens, the changes aren’t likely to be so drastic that it impacts your student loan repayment plan. A $10,000 debt cancellation, eliminating the tax bomb or allowing bankruptcy on student loan debt won’t affect most of you carrying around six-figures of student loan debt.
To discuss your repayment options and how each scenario might affect your student loans, book a consult to get a custom plan and eliminate your student loan anxiety.