President Biden and House and Senate Democrats have the power to make major changes to student loan policy in the next couple years. What does this mean for student loan forgiveness, debt cancellation and the Biden student loan plan overall?
Expect improvement of the PSLF program, faster discharge of student loans taken out from fraudulent for-profit colleges, large increases in Pell grants, and narrowly targeted student debt cancellation. It’s possible we could also income driven repayment programs become more generous, particularly for those with undergraduate student debt only.
In this post, we’ll show you the seven key planks of the Biden student loan plan, and we rate each part of his plan on how likely we think it is to pass given that there is Democratic control of Congress.
Editor’s Note: the first action taken by President Biden on student loans was to extend the suspension on interest and payments until September 30, 2021.
1. Expand student loan forgiveness programs
The first part of the Biden student loan forgiveness agenda is to expand student loan forgiveness programs like PSLF.
Biden supports the What You Can Do for Your Country Act. This bill would dramatically expand the Public Service Loan Forgiveness Program, which forgives student loans for public servants after 10 years of income-driven payments, tax-free.
The bill would allow for 50% forgiveness after five years, enable borrowers with non-qualifying loans to receive forgiveness and grow the pool of eligible employers.
Biden also supports a new forgiveness program that would forgive up to $10,000 per year for up to five years of national or community service. That’s in response to criticisms that the current PSLF program does not help forgive the student loans of public servants who owe smaller balances.
Biden will most likely streamline and improve the PSLF application process, some of which would have happened anyway due to how the program was structured.
Rating: Expect PSLF improvements and strengthening of the program. If a new generous PSLF type program is created, expect it benefit primarily borrowers with five figure balances such as nurses and firefighters. Current borrowers pursuing PSLF will be unaffected. Borrowers yet to take out student loans will likely still have access to the PSLF program for years to come.
2. Allow bankruptcy discharge
When President Biden was Senator Biden, he represented the state of Delaware, which is famous for having a large number of credit card and financial companies.
He voted to reduce bankruptcy protections for borrowers and helped contribute to the current state of affairs where private and federal student loans are the most difficult debt to discharge in a bankruptcy court.
However, as part of the Obama administration, he supported a bill to restore the ability to discharge private student debt in bankruptcy, even though it did not pass. That shows Biden’s pragmatism and his willingness to support the interests of the constituency he represents.
The current process to discharge student loans depends on where you live, who your lender is and whether they sue you within a statute of limitations, among other considerations.
Allowing bankruptcy discharge would likely bring relief to many struggling borrowers. It may or may not raise borrowing costs significantly for those who take out private student loans.
Rating: Likely to get brought up at some point. Relaxing the bankruptcy rules for student loans is one of the more likely student loan changes we think could occur in a Biden presidency.
3. Massively reduce income-driven payments
If you earn less than $25,000, Biden has proposed that you would pay nothing on your undergraduate loans and accrue no interest.
For borrowers who earn more than $25,000, you would pay 5% of your discretionary income.
In my analysis, this is the most expensive plank in the Biden student loan plan.
Biden has consistently stated his desire to “halve student loan payments for undergraduates.”
He mentions cutting the payment in half because the current PAYE and REPAYE plans require 10% of income.
Now that Biden’s student loan plan is likely to get a vote in Congress, I would be extremely surprised if moderate Democrats support borrowers paying only 5% of their income.
What could be more likely is a large increase in the deduction borrowers can take before their IDR payments get calculated.
For example, currently discretionary income determines student loan IDR payments. Discretionary income is your AGI minus 150% of the poverty line. Democrats might try to increase that deduction to 300% of the poverty line, while compromising with Republicans to not lower the percent of income a borrower must pay.
Rating: Highly unlikely that borrowers will get to pay 5% of their incomes for IDR payments. If Congress and the White House decide to reauthorize the Higher Education Act and simplify student loan repayment, we might see larger deductions for IDR plans in exchange for fewer options to exclude spousal income and longer forgiveness terms for graduate school borrowers (for future borrowers only).
4. Increase Pell Grants and make public college free
Most Democratic Presidential candidates wanted to double Pell Grant funding. Moderate Republican Senators might support this to some degree as well.
Biden supports making all four-year public universities tuition-free, as well as community colleges. This will get strong Republican opposition and possibly even some opposition from moderate House Democrats as well.
Biden also calls for more funding for Historically Black Colleges and Universities. That’s something some Republicans might be on board with.
Rating: We expect significant increases in Pell grants with crossover bipartisan support for initiatives like increasing funding to HBCUs and other minority serving institutions. That said, the Pell grant limit increase will likely not be doubled. It will be something more moderate than that.
5. Eliminate taxes on forgiven student loans
If you do not pursue the PSLF program, then any forgiven student loan debt goes on your 1099-C in the year of forgiveness.
Additionally, you must pay income taxes on the forgiven amount.
Biden’s student loan forgiveness plan would end this practice.
In reality, the IRS has a low chance of collecting five- and six-figure tax bills when the typical American family does not have anywhere close to that in liquid assets.
For at least a couple of years, we’ve advised our thousands of student loan planning clients to plan as if they will owe their tax bomb, but to expect that it won’t actually happen when trying to decide if they should refinance or not.
I believe Republicans have pushed back against removing the taxes on student loan forgiveness as a bargaining chip in future student loan reform. If taxes on student loan forgiveness go away, there is absolutely no incentive to limit borrowing as a student once your surpass a certain level of debt.
Rating: Possible. If Congress decides to reauthorize the Higher Education Act in the next couple of years, moderate Senators will have big leverage over the final product. While it’s quite possible this “tax bomb” will go away, we would anticipate that this would be a trade in exchange for something like limiting the Grad PLUS program, for example.
6. Forgive undergraduate student loan debt for public college tuition costs
For borrowers earning less than $125,000, Biden’ student loan plan would forgive any undergraduate debt taken out at a four-year or two-year public institution.
Why limit this forgiveness to public institutions? Because it costs less while still having a big impact for many borrowers.
Biden wants the federal government to make payments for borrowers until the loans are forgiven. The income test would likely be per-year instead of having all the debt forgiven at once. That way you wouldn’t encourage borrowers to minimize their income in a specific year.
Note that undergraduate loans he’s talking about likely only include Stafford loans, which are limited to no more than $57,500 for four years of undergrad. Most borrowers at public colleges borrow much less than this.
Also, many of our clients at Student Loan Planner go on to pursue additional education and take on graduate student debt. Their payments are income-driven, which means their payments are no different if they had their undergraduate debt forgiven. Would Biden still require these borrowers to make payments? Likely.
President Biden claims this forgiveness will be financed by repealing the excess business losses tax cut. Even with a Democratic Senate, that would be a tough task.
This forgiveness would likely cost hundreds of billions of dollars and this tax cut would not cover the cost of widespread forgiveness.
Rating: Unlikely, as this proposal’s cost in the hundreds of billions of dollars would compete with other policy priorities of a Biden administration, like supporting the economy, providing stimulus checks, and making investments in healthcare and clean energy.
7. Forgive $10,000 of student debt for all borrowers
President Biden supports Senator Elizabeth Warren’s plan to forgive $10,000 of student loans for all borrowers, although he’s rejected Senator Schumer’s proposal to cancel $50,000 via executive order.
The idea is that the COVID-19 economic crisis has generated great financial hardship across the country, and forgiving $10,000 of student loan debt could aid in the recovery.
There are provisions in the legal code governing student loans that allowed President Trump and his Secretary of Education to extend the period of 0% interest on student loans from September 30, 2020 to December 31, 2020 and then January 31, 2021 due to the national emergency declaration.
President Biden used this authority to extend this interest and payment freeze further until September 30, 2021 in the first week of his Presidency.
Many in the Democratic Party believe that same legal code gives the President power to direct the Secretary of Education to cancel student debt.
There’s definitely an argument for this, but it would certainly be challenged legally if the Biden administration tried to do it.
With a conservative Supreme Court, any highly progressive executive orders would likely be subject to successful challenges.
However, with a Democratically controlled Senate, progressive pressure will likely ensure that student debt cancellation is brought to a vote.
Rating: Some limited version of student debt cancellation is quite likely to receive a vote. Cancelling $10,000 for everyone would cost over $300 billion, which would compete with other progressive priorities just as providing free public college would. For that reason, we might see Democrats support cancelling $10,000 of student debt for borrowers in default, first responders, essential workers, or some similar limitation to make the cost of the bill low enough to potentially pass.
Borrowers with modest incomes will likely get more attention under the Biden student loan plan
The Congressional Budget Office released a report in February 2020 that over $200 billion of student loans would be forgiven in the 2020s, with 81% of the benefit going to graduate and professional students.
That seems like forever ago because of the pandemic, but the report received a lot of attention among policy makers.
Because of how the current student loan system benefits those with high debt disproportionately, I’d expect strong momentum around helping borrowers with smaller balances and modest incomes.
Expect moderation in changes to student loans in 2021 and 2022
Biden’s student loan policy proposals would likely continue the trends of the Obama administration while also reflecting the overall progressive political trends in the Democratic Party.
However, the last time we saw massive change in student loans in the financial crisis, Democrats enjoyed a supermajority of 60 Senators. They are split 50-50 now, giving Vice President Kamala Harris the tiebreaking vote.
That’s not a generational change-making majority. It’s a majority where moderates of both parties will be the kingmakers, which we expect will be reflected in moderate student loan legislation that has bipartisan support.
Narrow Democratic control of Congress will moderate what Biden can achieve on education policy. There’s definitely room for a grand compromise bill on student loans, but it depends on what kind of political environment exists after the first several months of Biden’s administration, where Republican opposition to Democratic stimulus proposals will likely increase significantly.
Will Student Loans Be a Primary Focus of Biden? It’s Not Certain
Given the seriousness of the pandemic, President Biden might focus on other priorities such as the economy and healthcare while simply allowing student loans to begin again in September 2021.
Additionally, any changes to student loan repayment plans or forgiveness tend to take effect on July of the following year that a bill is passed. That means we could be waiting a while for any potential changes. In fact, it would be unlikely to see changes to the current system before July 2022 to give enough time for the executive and legislative branch to create new policy.
Student loan refinancing is also likely going to continue under a Biden administration. You should be refinancing private loans right now, and you’ll want to start refinancing federal loans once it becomes clear Biden will not further extend the zero interest policy that has been in place during the pandemic.
Specifically, if Biden eliminates taxes on forgiven student loans, we would expect that anyone with a debt to income ratio below 1.25 should refinance their federal student debt.
Expect lots of talk about student loan changes until January 2023, when we may or may not have a different party controlling Congress.
Remember though, the Republicans controlled the White House and Congress with bigger margins than the Democrats currently do in 2017. They tried to pass the Prosper Act, which went nowhere because it didn’t have bipartisan support in the Senate.
Any big student loan changes will likely need to get the support of moderate Senators from both parties. So we might be in store for less change than you’d think.
What do you think of Biden’s student loan plan? Let us know in the comments.