President Joe Biden’s student loan proposals have garnered national attention — especially the promise he made on the campaign trail to forgive $10,000 of federal student loan debt for borrowers as part of pandemic relief measures.
This promise, part of the Biden Emergency Action Plan to Save the Economy, would affect only borrowers with federal student loans.
Here’s what you need to know about his proposal and how it could impact your student loan debt.
Biden’s plan could alleviate debt for the majority of borrowers
Student loan debt continues to grow in the United States; the most recent statistics from MeasureOne report a total of almost $1.6 trillion in outstanding student loans, 92 percent of which are federally owned.
From free or reduced college tuition to revised income-driven repayment plans, Biden’s potential policies could radically change student loan borrowers’ financial picture.
In addition to these more systemic changes, Biden has also suggested more immediate relief. One measure proposed in Biden’s Emergency Action Plan would grant all federal student loan borrowers $10,000 or more in student loan forgiveness in order to promote economic recovery. Unlike the long-term forgiveness indicated in his other proposals, this student loan cancellation wouldn’t be conditional on service.
For some borrowers, $10,000 in forgiveness may seem like a small fraction. However, a recent report by the Department of Education found that about 15 million borrowers have federal student loan debt of $10,000 or less — meaning around a third of federal student loan borrowers would see all of their federal debt erased.
What’s more, a Bankrate survey found that 73 percent of millennials have delayed major life milestones due to their student loan debt. With $10,000 alleviated, those goals could be more attainable. To put it into perspective, $10,000 could pay for a car or serve as a down payment on a home.
Biden is exploring the possibility of an executive order
How likely it is that this measure will pass depends in part on the details of the policy, says financial aid expert Mark Kantrowitz. Sens. Elizabeth Warren and Chuck Schumer have also put pressure on Biden to increase the forgiveness amount to $50,000, so the details about how much forgiveness a student loan borrower could receive may change.
Whether or not Biden will use an executive order for student loan forgiveness has been the subject of debate. On Nov. 16, 2020, Sen. Warren tweeted, “Student loan debt is holding back a whole generation from buying homes, starting small businesses, and saving for retirement – all things we rely on to grow our economy. Executive action to #CancelStudentDebt would be a huge economic stimulus during and after this crisis.”
Biden has traditionally favored the idea of going through Congress to pass student loan reform. However, Biden recently asked Secretary of Education Miguel Cardona to explore the possibility of canceling student loan debt through an executive order. Depending on the results of the memo, we may see Biden change his mind on canceling student debt through an executive order.
Student loan forgiveness is now tax-free
While the future of a widespread student loan forgiveness is uncertain, Congress is laying the groundwork for a possible student loan forgiveness rollout. As a part of the American Rescue Plan, Democratic Sens. Elizabeth Warren and Bob Menendez introduced a provision that allows for all student loan forgiveness to be tax-free through 2025. Previously, most forgiven federal student loans were taxed as income.
Where is the money coming from?
Biden’s plans to help alleviate the rising student loan debt may come with a big price tag. “Fundamentally, you have to get the money from somewhere,” says Kantrowitz. “So it’s either going to be taxing individuals, taxing businesses or increasing the deficit. Those are the three main sources.”
Ultimately, the question is whether the burden of at least a portion of the existing debt will be placed on the backs of taxpayers, says Mark Hamrick, Washington Bureau Chief and senior economic analyst for Bankrate. “That is a tricky question, and one which Biden and others will need to navigate if the matter is addressed.”
Should you keep making student loan payments if forgiveness is possible?
The hope of student loan cancellation can seem like a great reason to stop making payments on your student loans. But there are multiple factors to consider before making this decision.
- There are no loan cancellation guarantees. Currently, the topic of student loan debt cancellation or forgiveness is a hot topic among lawmakers. However, there has been no formal policy or law passed yet. Conditions for forgiveness could be modified or changed completely before a policy becomes final. Relying on forgiveness could put you in a tight spot later if you end up responsible for the payments you skip.
- Federal student loan payments aren’t required right now. Pausing loan payments right now could be a good idea if you have other financial priorities. As part of a coronavirus relief policy, federal student loans aren’t accruing interest and don’t require payments until Sept. 30, 2021. If you need to build up your savings or have other debts to pay off, now is the best time to pause your student loan payments.
- Forgiveness won’t automatically remove all debt. If the $10,000 forgiveness passes and you have more student loan debt than that, you will still be responsible for the remainder of your debt. Working on it now will make future loan management easier, whether forgiveness happens or not.
What’s next for student loans?
In addition to Biden’s Emergency Action Plan, he has also proposed measures to forgive $10,000 in student loan debt per year (up to five years) for borrowers who complete national or community service, double Pell Grant values and lower the obligations of people on income-driven repayment plans. In his first months in office, he has also worked with the Department of Education to revise existing programs that offer loan forgiveness, like total and permanent disability discharge and borrower defense to repayment.
It’s important to remember that Biden’s Emergency Action Plan, as well as his more long-term student loan plans, are only proposals at this point. For now, federal borrowers can continue to take advantage of the federal forbearance period, which President Biden has extended through Sept. 30, 2021.