What does President Joe Biden’s plan for student loans mean for student loan forgiveness, student debt cancellation and college affordability?
We 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.
So far, President Biden has extended the freeze on federal student loan payments and interest first until September 30, and then one final extension until January 31, 2022.
The Democratic Congress passed the American Recovery Plan (ARP) in March, which eliminates income taxes on forgiven or canceled federal and private student loans until December 31, 2025. This could create a precedent for permanently eliminating taxes on student loan debt forgiveness.
In August, Education Secretary Miguel Cardona announced $5.8 billion in student loan discharges for over 323,000 borrowers who have a total and permanent disability.
However, the outline for Biden’s $3.5 trillion healthcare and education plan seemed to exclude major student loan initiatives. This suggests most changes to student loans will have to be accomplished by executive orders from this point on.
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 by 2024 given Democratic control of Congress until January 2023.
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 through the Department of Education.
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 qualifying payments, tax-free.
The bill would allow for 50% forgiveness after five years, enable federal student loan 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 to 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. There’s still a chance we could see borrowers with older loans such as FFEL receive credit for past payments, in particular those who have FFEL loans owned by the Department of Education.
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: Highly likely to get brought up prior to 2024. There was recently a bipartisan bill introduced to make schools share the risk of borrowers defaulting. Relaxing the bankruptcy rules for student loans has bipartisan support, so we think there is a real chance we’ll see movement on this issue.
3. Reduce income-driven monthly 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.
President Biden might be able to accomplish this through the negotiated rulemaking process his administration recently began. This could allow him to change or simplify existing income driven repayment programs. That said, we would anticipate a new option could be offered, and borrowers could choose to stick with their current plan or change to the new one.
Another change that might happen is an increase in the deduction for income driven repayment. 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 for lower income borrowers, while compromising with Republicans to not lower the percent of income a borrower must pay.
Rating: Borrowers with graduate degrees should expect to continue to pay 10% of income. It’s possible that borrowers will only have to pay 5% of their income on undergraduate debt, but less likely than other proposals.
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 offering free community college. This will get strong Republican opposition and possibly even some opposition from moderate House Democrats as well. We think this plank of Biden’s platform would have to get addressed in the upcoming $3.5 trillion reconciliation bill if it’s addressed at all.
Rating: We expect increases in Pell grants given the reconciliation bill. 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
Senate Democrats successfully included this provision in Sec. 9675 of the American Recovery Plan.
Student loan forgiveness is now tax-free until the end of 2025. This policy is not permanent though. We would need to see complete Democratic control after the 2024 elections for it to be extended.
Hence, nothing has changed for borrowers expecting forgiveness in the 2030s or 2040s, except a potential precedent has been created making tax-free forgiveness more likely.
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.
Rating: Enacted. However, this change-making student loan forgiveness tax-free is temporary, not permanent, as Democrats in Congress had to work within the confines of the reconciliation process. We expect it will be extended in 2025 if Democrats win Congress and the White House in 2024. However, it could potentially go away in 2025 if Republicans control either of these levers of power in after 2024. It’s likely though that this creates a precedent that will be extended.
6. Forgive undergraduate student loan debt for public college tuition costs
For borrowers earning less than $125,000, Biden’s 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: Highly 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. With tax increases reported to be on the table already, President Biden will likely use this tax revenue for other purposes, and we expect his focus will be on fulfilling some type of cancellation that he can do without legislation.
7. Cancel $10,000 of student debt for all borrowers
President Biden supports canceling $10,000 of student loans for all borrowers, although only through the legislative process. He’s rejected Senate Majority Leader Chuck Schumer’s proposal (which is also supported by Elizabeth Warren) to cancel $50,000 via executive order, or even $10,000 via executive order. Speaker Nancy Pelosi has said that President Biden cannot cancel debt via executive order. This makes broad student debt relief through cancellation increasingly unlikely.
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 extended this pause further to January 31, 2022.
Rating: Cancelling student debt was a major campaign pledge for President Biden. However, that pledge runs into the reality of not having enough money in the $3.5 trillion reconciliation bill to enact this pledge. With the executive order route most likely cutoff, we expect President Biden will cancel debt for more targeted groups of borrowers, such as the disabled, defrauded, or students in longer term default.
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 policymakers.
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 modest changes to student loans in 2021 and 2022
Biden’s student loan policy changes will likely continue the trends of the Obama administration while also reflecting the overall progressive political representation in the Democratic Party.
However, the last time we saw massive change in student loans was in the financial crisis when Democrats enjoyed a supermajority of 60 Senators. The Senate is split 50-50 now, giving Vice President Kamala Harris the tiebreaking vote.
Narrow Democratic control of Congress will moderate what Biden can achieve on education policy, given that most changes now need to be accomplished through executive order.
Will Student Loans Be a Primary Focus of Biden? We’ll Have to Wait and See
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 branches to create new policy.
Since the pandemic is the main focus, we could see some effort at cancellation in fall 2021, followed by a series of executive orders meant to improve student loan forgiveness and income-driven repayment.
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 you become worried about rising interest rates or when the interest freeze expires, whichever comes first.
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, but it went nowhere because it didn’t have bipartisan support in the Senate.
Instead of focusing their legislative power on student loans, Republicans used the reconciliation process to target ACA repeal and cutting taxes. In other words, other policies were more important to them than reforming student loans. The same will probably be true for the Democrats.
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 on student loans than you’d think from here until 2023.
What do you think of Biden’s student loan plan? Let us know in the comments.