Being the second-biggest form of household debt in the USA, student loans keep grabbing headlines. After the Biden administration laid the groundwork for student debt forgiveness, millions of students saddled with student loan debt got a boost of hope. The potential bill is still in its early stages, and, for now, it has taken the back seat while it’s under legal review. However, the issue will be brought up again in the near future. So, you will need to know how Biden’s student loan forgiveness would work and what the tax implications are.
What is Biden’s student loan forgiveness plan?
Student loans are a significant financial burden on many Americans and one of the first difficulties graduates face when they start navigating the real world. If we were to talk numbers, roughly 45 million Americans are struggling to pay off their student loan debt. According to Federal Reserve data, student debt in the U.S. has spilled over $1.7 trillion.
Over the past decade, the costs of attending college have grown by more than 16%. As a result, student debt has skyrocketed, increasing by 99%. Today, approximately 70% of students take out loans to finance their education at an average amount of $30,000 per student. Certainly, going to college is taking an enormous bite out of your wallet. Add the moving to college costs and daily expenses; it has always been difficult for students to overcome the obstacles they run into. And that was before COVID-19 even hit. However, getting a higher education can also mean the difference between a low-to-mid-range wage and being able to hob-knob with the upper crust.
In a nutshell, putting money toward student loans is crushing the Millennials. It limits their choices for decades. They have to delay purchasing a home, starting a family, investing in a business, and saving for retirement. Moreover, it decreases their net worth, wreaks havoc on their credit report, disqualifies them for employment, etc.
All of these problems have always weighed down those who dream of relocating and becoming independent. When a young mind starts the journey into adulthood, it should be the time filled with positivity and anticipation of a bright future. Instead, it is overshadowed by the worries of the financial burdens student loans are more than likely to bring.
2021 might bring some striking changes
President Joseph R. Biden Jr. took the oath of office with an eye toward reshaping higher education and relieving the strain of student loan debt. On Biden’s first day, he extended the freeze on federal loan payments through Sept. 30, 2021. Now, the legislative body seems to be seriously considering student loan debt forgiveness. This has prompted renewed calls. Chuck Schumer, the Senate’s top Democrat, and other Democratic legislators have pressured President Joe Biden to forgive up to $50,000 in federal student loans through executive order. More than 400 organizations have joined the push. They asserted it would tackle racial disparities, boost the economy, and provide stimulus to help all Americans weather the pandemic and recession.
The administration, however, has underlined $10,000 per student as its target. According to federal data, 15 million federal borrowers could see their balances fall to zero. Broad student loan forgiveness could also reduce balances for millions more. Jen Psaki, White House press secretary, has stated that President would sign student loan forgiveness legislation passed by Congress. Congress, however, is nowadays focusing on other pressing matters. Borrowers remain hopeful that the bill will go through. But how everything will play out is still unclear.
Who would be eligible for student loan forgiveness?
It is pretty straightforward in the sense that only active federal student loans qualify for loan forgiveness. What we can expect with relative certainty is that private student loans will be exempt from the forgiveness plan. Also, the sweeping student loan forgiveness bill will not exclude students by demographics. However, the Biden administration is still conducting its legal review. In light of this, there is simply no way of knowing for sure whether Biden will forgive student loans or who would be eligible.
He could include some form of eligibility criteria. However, it is still too soon to know what it may look like. Eligibility could be restricted to borrowers based on their loan balances, incomes, or the type of school or educational program that they attended. Eligibility could also depend on the type of loans a borrower has.
For now, we can conclude that to qualify for the $1 billion student loan cancellation, here are the criteria you must meet:
- You must be one of 72,000 student loan borrowers;
- Your educational institution misled or defrauded you, or your school closed permanently, and you have proved this to the U.S. Department of Education;
- You applied for student loan cancellation under borrower defense;
- Financial harm befell you;
- You already got some cancellations, but not all your student loans were canceled.
I was a victim of fraud from an online for-profit school. How does this help me?
Good news for scam victims. Those defrauded by for-profit colleges will be released from debt. Before the new Secretary of Education, Miguel Cardona, took over, student loan forgiveness was calculated unfavorably for the scammed students who never graduated. Namely, the calculations were done based on the current earning of the applicant. Now, however, all students defrauded by for-profit colleges are granted total debt forgiveness.
Miguel Cardona believes that those who have been victims of their institution’s misconduct deserve a fresh start and a fair chance for relief from debt. Additionally, these candidates will also be eligible for federal aid, and any shadows on their credit scores will be removed.
However, we must take the fact that there are many more unprocessed claims into consideration. Out of 200,000 applications, only 72,000 have been processed, and the changes only apply to them. Still, the Biden administration expects more guideline changes regarding debt forgiveness as things move forward.
What are alternatives to student loan forgiveness if I am not eligible?
There are several options. However, until Biden’s student loan forgiveness plan becomes a reality, do not expect a magic wand to miraculously write off all of your debt.
Income-driven repayment plans and the Public Service Loan Forgiveness program are the two most popular ways to get your student loan forgiven. Both only apply to federal student loans.
Income-driven repayment plans
With Income-driven repayment plans, you make payments based on your income, family size, and state of residence, and there are four types of plans:
- Income-Based Repayment (IBR)
- Pay As You Earn (PAYE)
- Revised Pay As You Earn (REPAYE)
- Income-Contingent Repayment (ICR)
These plans require you to pay 10-20% of your discretionary income monthly. However, you must know that interest will still accumulate regardless of how low your monthly payments are. After you have been paying every month for 20 or 25 years, depending on whether you had an undergraduate or graduate student loan respectfully, you can receive forgiveness for the remaining balance. But, you may still owe income tax on the amount of loan you have received forgiveness for.
Public Service Loan Forgiveness program
Public Service Loan Forgiveness helps borrowers receive student loan forgiveness. In order to qualify, among some other requirements, you must:
- work for a qualified public service or non-profit employer. Saying you work in public service is not enough;
- have a full-time job that involves a minimum of 30 hours per week
- make 120 monthly payments
- be enrolled in an income-driven repayment plan
- make a majority of your monthly student loan payments while having in an income-driven repayment plan
The difference between Public Service Loan Forgiveness and income-driven repayment plans is that you won’t owe income tax for the amount of loan you have received forgiveness for with the Public Service Loan Forgiveness program. The downside of both is that they take a long time. At least 120 months is necessary to be eligible for the Public Service Loan Forgiveness program and 20 or 25 years for the income-driven repayment plans.
Smart moves you can take
While waiting for the student loan forgiveness to hopefully kick in, you can explore some other options. Those who took out student loans under the Federal Family Education Loan program before 2010 cannot pause their payments without interest accumulating. For that reason, they are worried that they may also be excluded from the student loan forgiveness plan.
In order to circumvent this, these borrowers should consider consolidating Federal Family Education Loans into the Direct Loan program. That way, they will qualify for forgiveness, but the repayment timeline will reset. Therefore, this option may not be suitable for those nearing the end of their payment plans.
Also, those considering refinancing federal student loans into private loans because of lower interest rates should wait a bit longer and see how the situation develops.
What are the tax implications of student loan forgiveness under Biden’s plan?
Owing to a provision in the $1.9 trillion federal coronavirus stimulus package, student loan forgiveness is tax-free. Before this stimulus package became law in March this year, all student loan debt that got canceled was taxable and imposed on the borrower’s income tax rate. So, if a borrower received $50,000 student loan forgiveness, they would have to pay a whopping $10,000 to the IRS. Thankfully, borrowers are now free of these bills.
All things considered, any student loan forgiveness plan can only be a good thing. However, we mustn’t forget that the key to all the troubles is the change of the system. A one-off help will change nothing in the long run. It is crucial to implement the changes that will prevent people from getting into such difficult financial troubles in the future. The new administration needs to deal with the root of the problem rather than implement short-term and, ultimately, futile fixes.
