College graduates in the US owe an average of nearly $30,000 in student debt. Although payments on federal student loans have been paused during the pandemic, they will eventually resume.
Once student loan payments unpause, they will once again become one of the largest items on most family budgets. Thus a policy to reduce or cancel student debt could help many individuals and families tremendously.
During his campaign, President Joe Biden outlined the changes that he would make to current student loan forgiveness programs as well as new proposals he plans to introduce. What are these plans and how could they affect you? Let’s take a look at the Biden student loan forgiveness proposals that have been made so far.
Biden Student Loan Forgiveness Changes
President Biden has taken the following actions to help student loan borrowers.
Making Student Loan Forgiveness Tax-Free Federally
With the passage of the American Recovery Act (the third round of stimulus), President Biden made all student loan forgiveness tax-free through December 31, 2025. He did NOT create any new loan forgiveness programs, but he made sure that all existing student loan forgiveness and discharge programs will be tax-free.
This includes Federal loans - like Direct and FFEL - as well as any private student loan discharge.
Prior to this, only Public Service Loan Forgiveness and Disability Discharge were tax-free. Now, this opens up other loan forgiveness, such as income-driven repayment plan forgiveness.
Many also think this could pave the way for student loan forgiveness by executive order.
However, this law does not address the state taxability of student loan forgiveness. Many states have not conformed with prior laws like this, so any loan forgiveness (even from programs like PSLF) may still be taxable on the state level.
Making It Easier For Student Loan Borrowers To Get A Mortgage
President Biden asked the FHA to change the rules for mortgage lenders to make it easier for borrowers who are on income-driven repayment plans to get a mortgage.
Currently, the rule is that if you're on an income-driven repayment plan, the lender must use 1% of your loan amount as a monthly payment, or the amount reported on your credit report. But what if your payment is $0 per month? This was a trouble-spot, and we've talked about it here: Getting A Mortgage On IBR or PAYE.
Biden changed the rules to the following: if your monthly payment is $0 under IBR or PAYE, the lender will now use 0.50% of your loan amount to calculate your monthly payment for your debt-to-income ratio. While this isn't as great as counting $0, it's better than counting 1%, which is what it was before.
Restoration of Disability Discharges For Some Borrowers
Disability Discharge is a tough program to navigate, but it is extremely beneficial for individuals who are totally or permanently disabled. However, one of the "catches" is that you may have to submit paperwork during a 3 year monitoring period after your disability to prove you're still disabled.
If you fail to submit that paperwork, your loan is re-instated. However, over the last two years (during the pandemic) some borrowers were saying they never received notices or weren't able to get their paperwork.
President Biden reversed the reinstatement of the student loans, which will provide relief and forgiveness for 23,000 disabled Americans. See the order here.
Follow Through On Borrower Defense To Repayment Claims
Borrower Defense to Repayment is a program that allows borrowers who were defrauded by their college to have their loans forgiven. This program has been mired with problems for years, and eventually the Supreme Court ruled the program was legal and the President needed to process the claims.
However, President Trump and Education Secretary DeVos were sneaky - they processed the claims and then ruled that $0 in relief was due. So they followed the Supreme Court ruling, but still provided no relief to borrowers.
President Biden is changing that by providing 100% loan discharges for borrowers who qualify. This should help roughly 200,000 borrowers who were impacted by predatory lending. Specifically, at least 115,000 borrowers from ITT Tech will be positively impacted.
You can read the Department of Education memo here.
Extend Covid-19 Student Loan Relief
His first action on student loans came via Executive Order on January 20, 2021. President Biden extended the Covid-19 deferment and 0% interest on Federally-held student loans until January 31, 2022.
Biden Student Loan Forgiveness Proposals
There are five main Biden student loan forgiveness proposals. Most were laid out as part of a broader higher education plan. Here's what you need to know about each.
1. Forgive $10,000 Per Borrower
Since the pandemic began in March, Biden has repeatedly expressed support for providing $10,000 of forgiveness to all student loan borrowers. For people who owe $10,000 or less in student loans (which is over a third of borrowers) this could mean total cancellation of debt.
Unlike other Biden loan forgiveness proposals, eligibility for this debt cancellation would not be based on your type of employment or repayment plan. But it's possible that if you earn more than $125,000 per year, you could be excluded from this forgiveness program.
In early December, Senator Chuck Schumer indicated that President-Elect Biden was “considering” a senate resolution introduced by Senator Elizabeth Warren and himself. It calls for Biden to cancel up to $50,000 in student loan debt by executive action.
Over 100 community consumer and student advocacy organizations have publicly supported the resolution. However, it differs from the more conservative approach of limiting forgiveness to $10,000 that Biden has supported thus far.
2. Revamp The Income-Driven Repayment (IDR) Program
Joe Biden has also proposed a new Income-Driven Repayment (IDR) plan that would replace the four current IDR plans. This new plan would cut monthly payments from 10% to 5% of discretionary income above $25,000.
A key benefit of this proposal is that borrowers would not have to make any payments on their federal student loans (and interest will not accrue) if their income is below $25,000. The remaining debt would be forgiven after 20 years of payments.
Finally, it should be noted that student loan forgiveness on current income-driven repayment programs can be taxed as income. But Biden has sworn to change the IRS tax code to make loan forgiveness tax-free.
Related: Taxes And Student Loan Forgiveness
3. Improve And Supplement PSLF
The Public Service Loan Forgiveness (PSLF) program is advertised as being able to forgive your student debt in full if you work for a qualifying public service employer for 10 years. That sounds great on paper. But, in reality, few people have received forgiveness from the program.
As of September 2020, only 5,069 out of 179,371 applications for PSLF had been approved. That means a whopping 174,302 applications have been denied. It also means that the dismal approval rate is less than 3%.
Biden proposes to create a new, simpler program while also reworking PSLF. The new program for public service workers would offer up to $10,000 of forgiveness per year for up to five years. So within 5 years, qualifying borrowers could have $50,000 of their student loans forgiven.
Borrowers with more than $50,000 of student loans could still pursue PSLF. But to improve the approval, Biden has pledged to help pass the What Can You Do For Your Country Act of 2019. This bill would close many of the loopholes that have caused such a large percentage of PSLF applications to be denied to date.
4. Restore the Borrower Defense Rule
There are borrowers who have fallen victim to misrepresentations made by colleges about their student loans or education programs.
This is not the fault of the borrower. The current administration changed the rules so that only 4% of Borrower Defense to Repayment cases were approved. These rules were done simply via "loopholes" the Secretary of Education found in policy - such as "we have to process applications, but not approve a specific amount of forgiveness".
Joe Biden has proposed to bring back rules that help more people who have been swindled by dishonest schools.
5. Permit Private Student Loan Discharge In Bankruptcy
Joe Biden has also proposed to repeal 11 USC 523(a)(8). This section of the U.S. Bankruptcy Code provides an exception so that federal and private student loan debt cannot be discharged in the same manner as other debts.
In order to have your student loans discharged in a bankruptcy filing, you need to show that you have extenuating circumstances and that paying off your student loans would cause "undue hardship" on you and your family.
This new rule has made it very difficult for borrowers to get their student loans discharged in bankruptcy court. The Obama-Biden administration tried to repeal this section of the bankruptcy law in 2015. Now Biden is promising to finish the job by enacting this legislation during his own presidential term.
Critiques Of Biden Student Loan Forgiveness Proposals
Canceling even $10,000 of student loan debt would mean financial relief for a lot of American families. But opponents of President-elect Biden’s proposals have said that this kind of sweeping debt cancellation undermines the efforts of borrowers who have worked hard to pay off their loans.
Another criticism is that such a legislation would largely benefit people who are already well-off. The thought process here is that people from financially stable backgrounds are more likely to have attended the best schools (with the highest tuition rates) and completed their degrees.
According to Census.gov, high school was the highest level of education attainment in 2019 for 28.1% of people age 25 and older. And only 22.5% had finished four years of college. On average, people with bachelors degrees out-earn those without them. Also, borrowers with the largest debt totals are often those who pursued advanced degrees in high-paying fields.
For these reasons, critics fear that forgiving large student loan balances would only serve to widen the American income and wealth gaps. This is why many economists and politicians have advised Biden to reject the calls to increase the forgiveness limit to $50,000.
College tuition is not getting any cheaper. Between 1985 and 2017, average college tuition rates went up by about five times. That massive increase is nearly double the rate of inflation.
It's easy to see why so many people are struggling to manage their student debt and are closely following Biden student loan forgiveness proposals. However, barring changes made by executive action, it could still take some time for new student loan legislation to pass Congress.
In the meantime, federal borrowers may be able to find immediate student loan relief through IDR plans or applying for forbearance or deferment. And private loan borrowers may be able to lower their student loan payments by refinancing to a lower interest rate.
What are your thoughts on the Biden student loan forgiveness proposals? Let us know in the comments!
Robert Farrington is America’s Millennial Money Expert® and America’s Student Loan Debt Expert™, and the founder of The College Investor, a personal finance site dedicated to helping millennials escape student loan debt to start investing and building wealth for the future. You can learn more about him on the About Page, or on his personal site RobertFarrington.com.
He regularly writes about investing, student loan debt, and general personal finance topics geared towards anyone wanting to earn more, get out of debt, and start building wealth for the future.
He has been quoted in major publications including the New York Times, Washington Post, Fox, ABC, NBC, and more. He is also a regular contributor to Forbes.