4 Major Student Loan Takeaways from Biden’s Budget Proposal

The Biden administration unveiled a sprawling $5.8 trillion budget proposal this week. The plan covers everything from infrastructure projects to defense spending to social programs.

A presidential budget proposal is just the starting point for what will likely be a long budget negotiation process in Congress. Under the U.S. Constitution, Congress must pass a budget — not the President. But a president’s budget proposal can serve as a blueprint for what an administration thinks the federal government's spending priorities should be. However, it's ultimately up to Congress to draft legislation and pass it.

Biden's budget proposal released this week was revealing for student loan borrowers, both in terms of what is included and what was left out. Here’s an overview.

Biden’s budget plan provides some targeted higher education funding

Overall, Biden's budget proposal did not include many items to offer immediate relief to student loan borrowers. However, some specific higher education line items were geared towards helping students in general. Here's what was included:

• Funding to increase the maximum Pell Grant by $2,175 over the 2021-2022 academic year and double the maximum allowable award by 2029. Pell Grants are federal financial aid awards based on need that do not have to be repaid.
• $752 million in additional funding for Historically Black Colleges and Universities (HBCUs), Tribally Controlled Colleges and Universities (TCCUs), Minority Serving Institutions (MSIs), and low-resourced institutions, including community colleges.
• $161 million for the Department of Education’s Office for Civil Rights, a 23 percent increase compared to the 2021 enacted level. This additional funding would help the Department protect equal access to education through the enforcement of federal civil rights laws.

Education Secretary Miguel Cardona praised Biden’s budget in a statement earlier this week, saying that the funding for higher education “invests in access to affordable higher education and the creation of stronger pathways” to success.

Biden’s budget plan did not include much in the way of direct relief for students and borrowers

Biden’s budget plan was notable for what it didn’t include, such as the following:

• Free community college, a pillar of Biden's platform during his 2020 presidential campaign and a major component of his Build Back Better agenda, ultimately died in the Senate last year.
• Student loan forgiveness, which Biden also has expressed support for if enacted legislatively. Biden and top White House officials have repeatedly indicated that he would sign a student loan forgiveness bill if passed by Congress.
• Private student loan relief, which is important for borrowers, given that private loans have been excluded from federal emergency relief programs like the ongoing pause on most federal student loan payments.
• Permanent reforms to existing federal student loan forgiveness and repayment programs, which advocates argue have been poorly administered by the Department of Education and its contracted loan servicers for years.

One significant potential benefit for borrowers: permanent relief from taxation associated with student loan forgiveness

One important item that was included in the plan, however, is a proposal to make student loan forgiveness a non-taxable event permanently. Currently, student loan forgiveness may or may not be taxable, depending on the type of loan forgiveness at issue:

• Student loan forgiveness under several profession-based programs like Public Service Loan Forgiveness and Teacher Loan Forgiveness is not taxable under federal law.
• Student loan forgiveness under Borrower Defense to Repayment (a program that provides debt relief to students defrauded by their school) is generally not taxable under federal law but only under general federal guidance, not due to express language in legislation.
• Student loan discharges under the Total and Permanent Disability (TPD) program are temporarily not taxable through December 31, 2025, under the 2017 Tax Cuts and Jobs Act. But unless Congress acts, TPD discharges would become taxable again in 2026.
• Student loan forgiveness under income-driven repayment plans like REPAYE and IBR is generally considered taxable in most cases.

Last year, Congress passed (and President Biden signed) the American Rescue Plan, which exempts most forms of student loan forgiveness, including forgiveness under income-driven repayment plans, from federal taxation. But it does so only temporarily, through 2025. Biden's budget proposal would make this permanent — effectively removing looming tax liability for borrowers repaying their loans on 20 to 25-year terms under an income-driven plan.

The exclusion of student loan relief from the budget could mean more executive action

There are a few potential ways to read between the lines of Biden's budget proposal to discern what it means for student loan borrowers.

One interpretation is that the administration is simply not engaging in serious efforts to effectuate substantial student loan reform through legislation. By not pushing Congress to enact student loan forgiveness and other broad student loan reforms through statutes passed by Congress, the Biden administration may simply be acknowledging reality: in a closely divided Congress during an election year, it’s going to be very difficult to get anything passed, let alone something that most Republicans in Congress — and even some moderate Democrats — have balked at.

But the lack of student loan relief included in the budget may simply be a sign that the administration intends to utilize executive action to provide more impactful relief for borrowers. Top White House officials have suggested recently that Biden is considering extending the ongoing student loan pause, which is currently set to end in May.

And the administration may also be considering enacting additional student loan forgiveness through executive action. So far, the Education Department has touted approximately $16 billion in student loan forgiveness approved through its so-called “targeted” approach of expanding access to key programs, like Public Service Loan Forgiveness. It’s possible we could see a further expansion of these efforts. And although Biden himself has expressed skepticism that existing federal law provides sufficient authority for him to cancel student loan debt broadly without Congressional approval, advocates for borrowers argue that key provisions in statutes like the Higher Education Act to provide such authority. The administration has at least left the door open to using executive action more forcefully on the issue.

Meanwhile, the Education Department is also in the process of utilizing negotiated rulemaking to overhaul regulations governing key federal student loan programs, including Public Service Loan Forgiveness and income-driven repayment. It is too soon to know the final results of these efforts, but we may learn more in the coming months. New regulations would have to be finalized prior to July 2023.