Biden's Student Loan Forgiveness Plan - An Overview
/Last week, this article was included in our September Thought leadership email which is distributed exclusively to private clients of Clearwater Capital. It is now available for public viewing on this blog.
President Biden’s proposed Student Debt Forgiveness plan has garnered much attention since it was announced on August 24th, 2022. The proposed plan has not been without controversy, and has left many borrowers wondering what it would actually mean for them. Who does it apply to? How does it work? This article will not cover the various viewpoints of the supporters or proponents, nor my opinion of its efficacy, but rather will provide a general overview of how it would actually work if enacted.
First, the plan promises to provide $10,000 of student loan forgiveness for Federal student loan borrowers (and $20,000 for borrowers who received a Pell Grant for college). In order to qualify for the $10 or $20,000 forgiveness borrowers must have income levels under $125,000 for single borrowers and $250,000 for married couples in either 2020 or 2021. Interestingly enough, there does not appear to be a cliff threshold included in the proposal. Meaning, if you earned just $1 over the income levels you would lose out on all debt forgiveness - this will certainly create some interesting income dynamics.
Second, the plan does provide another extension of the pause on Federal student loan payments until December 31, 2022
Third, the plan introduces a new Income-Driven Repayment (IDR) plan. This concept would be a function of current income and aims to lower monthly payments and potentially reduce the time period required for loan forgiveness for eligible borrowers. This IDR plan limits payments on Federal undergraduate loans to 5% of the borrower’s discretionary income and forgives loans of less than $12,000 after 10 years of payments.
How will it work for taxes?
There has been much conversation about how any student debt forgiveness would work from a tax perspective. Typically, when a debt is forgiven it ends up being treated as taxable income for the borrower. Student debt canceled by the proposed plan would fall under the American Rescue Plan Act of 2021 and, as such, would NOT be required to count as taxable income at the Federal level. However, it does appear that this does not apply to the state income tax level, so for states like Illinois that do impose a state income tax the canceled debt would be considered taxable income at your state’s rate.
What loans will be eligible?
Another hot topic around this plan is what type of student loans would be eligible. Generally speaking, it looks like the forgiveness would only be for Federal loans which were funded by June 30, 2022. This has been met with much criticism because when discussions first began it was widely believed the plan’s scope would include all student debt (including privately held student debt) but this does not appear to be the case. There seems to be discussion to extend the coverage to include forgiveness to those borrowers whose FFEL (Federal Family Education Loan) loans are owned by private companies, either directly or via loans that are consolidated to Direct Federal loans, but that is still in development.
What do you need to do?
The White House has not made any sort of application process public yet. Many current borrowers will be “automatically enrolled” if they are already a part of the Income-Driven Repayment plan option and have income information on file with the U.S. Department of Education. Borrowers can sign up to receive automatic updates on the plan by visiting https://studentaid.gov/debt-relief-announcement/.
What’s next?
As mentioned at the beginning of this article, unsurprisingly this plan has been met with much controversy. Interestingly enough, the White House decided to implement these changes via executive action rather than through legislative passage.. It is expected for GOP members to bring extensive lawsuits in an effort to block the proposed executive action. The plan has received criticism from both Democrat and Republican leaders, and has caught the eye of many economists on just how realistic the whole plan is. It is likely that this will end up going all the way to the Supreme Court. Borrowers should stay up to date and monitor the likelihood of this going through as well as any potential updates made to the plan.
