President Joe Biden (Photo by Drew Angerer/Getty Images)
What’s the latest news on student loan cancellation?
Here’s what you need to know.
Student Loans
Will your student loans get cancelled? That’s the question that student loan borrowers and taxpayers have been asking. Given the proposals, the headlines, and the assumptions, let’s set the record straight. Here’s the latest:
1. We could have an answer on student loan cancellation soon
President Joe Biden wants student loan cancellation three ways. On a positive note, Biden has asked the U.S. Department of Education to provide a recommendation on whether he has the legal authority to enact student loan cancellation unilaterally by executive order. Previously, Biden said he doesn’t believe he has the authority to enact wide-scale student loan cancellation. Therefore, Biden wants Congress to cancel $10,000 of student loans immediately. The contents of the legal memo on student loans from the Education Department may settle whether Biden can proceed to cancel student loans, or whether he lacks the legal authority and therefore Congress would have to pass legislation to cancel student loan debt. The Trump administration previously wrote a legal memo that a president cannot enact student loan cancellation unilaterally without further authorization from Congress.
2. However, don’t expect student loan cancellation tomorrow
Don’t expect student loan cancellation tomorrow. The path to wide-scale student loan forgiveness, if any, could could be long. After Biden’s Education Department issues its opinion, it’s possible that you could get student loan cancellation, but there’s one major problem: the legal opinion not only is non-binding, but it’s simply a legal opinion. To have a binding decision, a court would need to issue a ruling on student loan forgiveness. If Biden proceeds to cancel student loans, it’s possible it may be challenged in court, which could delay implementation for months or longer.
3. Everyone won’t get student loan cancellation
Importantly, despite the headlines you may have read, it’s highly unlikely that you will get $50,000 of student loan cancellation. Biden has never supported $50,000 of student loan cancellation, and he has said repeatedly he would be unlikely to cancel up to $50,000 of student loans. The $50,000 number, which is repeated often, comes from a proposal in Congress from Senate Majority Leader Chuck Schumer (D-NY) and Sen. Elizabeth Warren (D-MA), both of whom are leading advocates for wide-scale student loan cancellation. Importantly, even their proposal wouldn’t forgive student loans for everyone. There are several limitations in their proposal, which is why it’s important to read the fine print. First, their proposal only applies to federal student loans. Second, their proposal only applies to student loan borrowers with an annual income up to $125,000. If Biden cancels student loans, he could apply these same limitations, or possibly make them more stringent. As a result, not everyone should expect student loan forgiveness.
4. Biden cancels $2.3 billion of student loans
There’s a lot of chatter how Biden won’t cancel student loans. However, since becoming president, Biden has already cancelled at least $2.3 billion of student loan debt. (You can learn if you qualify for the $2.3 billion of student loan forgiveness here). First, Biden cancelled $1 billion of student loans for 72,000 student loan borrowers and second, he cancelled another $1.3 billion of student loans for 41,000 borrowers with total and permanent disability. America has reacted to Biden’s student loan cancellation in different ways. Some have argued that this amount of student loan debt is not enough. For example, $2.3 billion is only 0.1% of the $1.7 trillion of outstanding student loan debt. Similarly, 110,000 of student loan borrowers only represents approximately 0.2% of the 45 million student loan borrowers. However, Biden has pursued a targeted approach to student loan cancellation. He has helped specific constituencies on a piecemeal basis, and likely will continue to do so in partnership with U.S. Secretary of Education Miguel Cardona.
5. Student loan forgiveness is now tax-free
The latest stimulus package included a big win for student loan borrowers. Any student loan cancellation is now tax-free through December 31, 2025. So, if you get student loan cancellation from Congress or the president, you would not owe any income tax on the amount of student loan forgiveness you receive. In contrast, before Warren and Sen. Bob Menendez (D-NJ) proposed this provision, student loan borrowers could have owed income tax on their remaining student loan balance that was forgiven. This tax-free provision also applies to student loan forgiveness through income-driven repayment plans such as IBR, PAYE, REPAYE and ICR. Student loan forgiveness through the Public Service Loan Forgiveness program already is tax-free.
6. Congress doesn’t have the votes to pass student loan cancellation
This may come as a surprise to many, but Congress doesn’t have the votes to pass student loan cancellation. There has always been two main paths to student loan forgiveness. The first path is through legislation from Congress. The second path, though more unlikely given constitutional limitations, is through an executive order from the president. If Biden doesn’t have the legal authority to cancel student loans, then Congress would be the remaining path to cancel student loans. The problem is that despite the rhetoric and news headlines, Congress doesn’t have the votes to pass the leading legislation for student loan forgiveness, which is Schumer’s and Warren’s plan to cancel up to $50,000 of student loans. Beyond a group of progressive senators, the full Democratic caucus doesn’t support cancelling $50,000 of student loans and no Republicans support it either. Similarly, Congress likely wouldn’t support $10,000 of outright student loan cancellation either. Therefore, to get any student loan cancellation, it will be incumbent on Congress to draft compromise legislation on student loan forgiveness and higher education reform that is potentially acceptable to members of both parties.
7. Student loan payments likely will resume October 1
This is not guaranteed, but there’s a high likelihood that your student loan payments will resume starting October 1, 2021. Currently, federal student loan payments and interest accrual are on temporary pause through September 30, 2021. When asked this week whether federal student loan payments will restart October 1, 2021 or be paused beyond that date, Cardona responded: “We’re looking at it. Obviously we are going to take lead from what the data is telling us and where we are as a country with regards to the recovery of the pandemic. It’s not out of the question, but at this point, it’s September 30.” If the payment pause is not extended, there will be correspondence from the U.S. Department of Education regarding next steps to restart stuednt loan payments. Through September 30, student loan borrowers will have received more than $90 billion of student loan cancellation since the beginning of the Covid-19 pandemic.
Will your student loans get cancelled?
Will your student loans get cancelled? The answer is not necessarily binary, and it could take longer than expected to get an answer. The Education Department is expected to provide its recommendations to the president within weeks. However, it’s possible that Biden won’t cancel student loans. Ultimately, according to White House Chief of Staff Ron Klain, Biden will make the final determination on student loan cancellation based on law and policy. Congress has the power today to pass legislation on student loan cancellation, but instead has pinned its hopes on a presidential proclamation. However, there’s no guarantee there will be any student loan cancellation now or in the future. If there is wide-scale student loan forgiveness, it also may not apply to all types of student loans or be available to everyone.
Make sure you understand all your options for student loans. Here are some potential options to consider:
