What does President-Elect Joe Biden winning the election mean for student loan forgiveness, debt cancellation, and your student loans?
Biden has supported a lot of the same student loan proposals as other moderate Democrats in the past. More recently, he embraced policies of the progressive wing of the party like free public college and limited student debt cancellation.
We know that this election did not produce the blue wave many expected. Even if the Democrats hold the Senate 50-50, there is no wiggle room for a progressive student loan agenda until January 2023 at the earliest.
There’s also no room for conservative priorities like eliminating PSLF or making student loan forgiveness less generous.
Hence, with expected legislative gridlock, Biden will not be able to pass much of his proposed agenda. He might turn to executive orders, as his team has said he believes he can use this power to cancel $50,000 of student debt. A 6-3 conservative Supreme Court might decide differently should Republicans challenge his executive orders.
Biden does not want student loan forgiveness for all $1.6 trillion of student debt as Sen. Sanders supports. According to Biden’s campaign, the cost of Biden’s student loan proposals come in at around $750 billion over 10 years compared to $1.6 trillion for Sanders.
However, we performed an extensive analysis of the projected cost of Biden’s student loan plan and arrived at an estimated cost of $2.9 trillion.
That’s far higher than the campaign estimate.
Hence, we can expect a far more modest student loan plan from Joe Biden than what he espoused on the campaign trail due to political realities.
Current borrowers could benefit from the Joe Biden student loan plan, but much of what he wants to do might not be possible now. Perhaps the most likely outcome is a lot of executive orders and perhaps some bipartisan bills involving PSLF or discharging debt from fraudulent schools.
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 extend the zero interest policy that has been in place during the pandemic.
We’ll show you the 7 key planks of the Biden plan for student loans, and we rate each part of his plan on how likely we think it is to pass with a Republican Senate, which is currently the most likely outcome according to national media outlets.
- 1. Expand student loan forgiveness programs
- 2. Allow bankruptcy discharge
- 3. Massively reduce income-driven payments
- 4. Increase Pell Grants and make public college free
- 5. Eliminate taxes on forgiven student loans
- 6. Forgive undergraduate student loan debt for public college tuition costs
- 7. Forgive $10,000 of student debt for all borrowers
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’s site mentions the support of 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 also allow for 50% student loan forgiveness after five years of service, enable borrowers with non-qualifying loans to receive forgiveness, and grow the pool of eligible employers.
He also supports a new program that would forgive up to $10,000 per year for up to five years of national or community service. This proposal would allow five years of prior service to qualify as well.
Biden would automatically enroll any nonprofit or government worker, which is the same population that is eligible for the PSLF program.
Could you get $10,000 per year forgiven, then 50% of your balance forgiven at year five, then the rest forgiven at year 10?
The road to the current student loan system in America was paved with good intentions. When the Bush and Obama administration made large changes to student loan programs, they created new ones in addition to old programs.
Certainly fixing the PSLF program is a sincere goal, but it seems like it could be a bureaucratic nightmare.
Biden and his team likely want to create something streamlined for borrowers in the public sector with smaller debts.
For comparison, Donald Trump has made his own student loan forgiveness proposals by calling for IDR payments to 12.5% of income and forgiveness after 15 years for undergraduate borrowers and 30 years for graduate borrowers. However, none of these changes have been adopted to date.
Rating: Highly unlikely as it would run into strong resistance from Senate Republicans. Only a bill that addresses bureaucratic struggles with the PSLF program might be possible
2. Allow bankruptcy discharge
When former Vice President Joe 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. It makes sense that he would continue to push this bill as President.
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 would also likely put much of the private student loan market out of business.
Rating: Possible in a compromise bill with a Republican Senate
3. Massively reduce income-driven payments
If you earn less than $25,000, 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.
JoeBiden.com calls out his desire to “halve student loan payments for undergraduates.”
He mentions halving the payment because the current PAYE and REPAYE plans require 10% of income.
The big question is whether he would make graduate and professional students pay the current income-driven payment rate of 10% of income or if he would include this group in the change to 5% of income.
Rating: Highly unlikely as it would run into strong resistance from Senate Republicans. If Congress and the White House decide to reauthorize the Higher Education Act and simplify student loan repayment, it’s very unlikely that the percent of your income dedicated to student loans under IDR plans falls below 10%.
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.
There is zero support for free public college in the Republican Senate.
Biden also calls for more funding for Historically Black Colleges and Universities. That’s something some Republicans might be on board with.
Rating: Pell Grant increases are possible, though if the limits increased it would not be by nearly as much as Biden proposes. A Republican Senate will not support making public college free
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.
Joe Biden’s student loan forgiveness reform proposals 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.
I believe Republicans have pushed back against removing the taxes on student loan forgiveness as a bargaining chip in future student loan reform. Eventually, we will have clarity on this issue, but Biden wants to get that clarity now instead of when borrowers receive giant tax bills.
Rating: Possible, though this would likely need to be part of a bigger compromise bill that simplifies the student loan system and it’s something Republicans might use to extract concessions from Democrats on something like the future of PSLF for borrowers who do not yet have loans.
6. Forgive undergraduate student loan debt for public college tuition costs
The next component of Biden student loan forgiveness: For borrowers earning less than $125,000, Biden would forgive any undergraduate debt taken out at a four-year or two-year public institution.
Why limit this forgiveness to public institutions? Likely 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 then 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 $0 undergraduate debt. Would Biden still require these borrowers to make payments? Likely.
President-Elect Biden claims this forgiveness will be financed by repealing the excess business losses tax cut. With a Republican Senate, that tax cut will not be getting repealed.
This forgiveness would likely cost hundreds of billions of dollars and this tax cut would not cover the cost of widespread forgiveness.
Rating: Extremely unlikely, as this proposal’s cost in the hundreds of billions of dollars would certainly run into staunch resistance in the Republican Senate
7. Forgive $10,000 of student debt for all borrowers
Biden now supports Senator Elizabeth Warren’s plan to forgive $10,000 of student loans for all borrowers. 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 due to national emergency declaration.
Biden’s team believes 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.
Rating: Extremely unlikely. This was a key part of the HEROES Act, which will not be passed with a Republican Senate. Biden might try it via executive order, but it would be contested if that happened
Why millions of borrowers could opt for forgiveness with the Biden student loan rules
This next part is hypothetical, since it seems very unlikely that Biden’s lower income based repayment plan will pass now.
Imagine you’re a family law attorney in a small practice outside of DC. You earn about $80,000 a year and only took out $100,000 for your law school debt.
Pretend you’re considering the Pay As You Earn plan, which allows you to pay 10% of your income for 20 years. The balance is taxed as income when forgiven.
Another option would be to refinance your loans for a fixed monthly payment, perhaps a 20-year term at a 4.50%.
Let’s compare that option to the new Biden student loan repayment plan.
The cost is of course half as much, as you might expect with payments that are 5% of income instead of 10% of income.
Previously, this borrower would have likely pursued a refinancing plan to pay off their debt in full.
Now, the cost of using the government repayment plan is only half of what refinancing is.
How borrowers with large forgiven balances would benefit under Biden
The CBO just released a report that over $200 billion of student loans would be forgiven in the 2020s, with 81% of the benefit going to graduate and professional students.
With an income-driven repayment plan that would cost borrowers half as much, this subsidy number should be at least double to $400 billion.
In reality, Biden’s plan would likely cost far more than that. Schools and borrowers would have no incentive to worry about the size of a forgiven student loan balance.
We’ve seen the cost of higher education soar under the current student loan policy under the Grad PLUS program passed in 2006, which allowed unlimited borrowing for higher education.
Let’s look at the cost of forgiveness for a veterinarian with $500,000 of student loans and a $100,000 income.
Not only does the cost fall from allowing the borrower to pay half, but the amount forgiven is now tax-free.
That reduces the cost of the forgiveness program in today’s dollars by 75% lower than the cost today.
Borrowers might not think like this at an individual level immediately, but over time policy incentives would reward schools that charge high prices for tuition.
We have already run these 5% forgiveness scenarios for undergraduates under Bloomberg’s plan, and we project millions of undergraduate borrowers would suddenly be good candidates for loan forgiveness too instead of debt repayment.
For Biden’s student loan plan to work, schools would need strict regulation
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.
Republican opposition will sharply limit what he 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 election.
Given the seriousness of the pandemic, his administration might focus on other priorities such as the economy and healthcare at first.
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.
Expect lots of executive orders and regulatory interpretations by the Department Education to govern student loans until January 2023, when we may or may not have a different party controlling Congress.
What do you think of Biden’s student loan plan? What do you think is possible to pass after the election? Let us know in the comments.