Why Biden’s Newest Student Loan Forgiveness Initiative Is So Important

Earlier this week, the Biden administration announced a sweeping new program that will dramatically expand income-contingent reimbursement programs. According to the Ministry of Education, tens of thousands of student borrowers will receive immediate forgiveness of their student loans.

But the benefits of this new initiative could go far beyond the first round of student loan forgiveness. The changes announced by the Biden administration could ultimately lead to several million borrowers see their student loans canceled in the coming years. This makes this new initiative potentially historic in its scope.

Biden’s New Student Loan Forgiveness Initiative Through Income-Based Repayment Expansion

Income-Based Repayment (IDR) (which includes individual plans such as Income-Based Repayment (IBR) and others) is a program unique to the federal student loan system. IDR plans allow borrowers to make payments based on their income and family size, with any remaining balance canceled after 20 or 25 years, depending on the plan.

But the IDR system has been plagued with problems for years. Consumer advocacy groups and federal and state regulators have accused the Department of Education and its contracted loan officers of mismanaging the program and misinforming borrowers, such as not telling borrowers about IDR. or by directing them towards abstentions instead, which do not count for the loan. discount and may result in uncontrolled growth of the balance due to the accumulation of interest. NPR recently revealed that the government and its contractors may not be tracking borrower IDR payments properly. And one report published this week by the Government Accountability Office (GAO) suggested that hundreds of thousands of borrowers eligible for student loan forgiveness through IDR programs could ultimately be turned down by 2030 because of this widespread mismanagement .

The Biden administration’s new initiative is designed to provide a “solution” to many of these problems. Under these new changes, the Ministry of Education will be able to retroactively count past repayment periods, as well as certain deferment and forbearance periods, toward a borrower’s student loan forgiveness period under the IDR. Here’s who qualifies.

Many more borrowers could get student loan forgiveness under Biden’s new IDR initiative

The effects of these patches can be significant. “Any borrower with loans that have accumulated repayment time of at least 20 or 25 years will see automatic forgiveness, even if you are not currently on an IDR plan,” the Department of Education says in updated guidelines released this week. Although periods of default do not count towards a borrower’s 20 or 25 year term, all repayment periods should count, and at least some deferment and forbearance periods may also count.

In addition, the Department will be able to account for payments made before loan consolidation. The Department “will count time for cancellation of IDR, including … any time for repayment prior to consolidation of consolidated loans.” It is unclear whether deferment or forbearance periods before loan consolidation will count, but even so, this is an important development. Until now, consolidation restarted the borrower at the start of their repayment term, erasing any past progress toward loan forgiveness. The fact that the Department of Education can now count repayment periods before loan consolidation will likely speed up loan forgiveness progress significantly for many borrowers.

Student loan forgiveness is tax-free under federal law – for now

It’s also worth noting that the Biden administration’s actions come at a time when most student loan forgiveness is tax-exempt under federal law. It has not always been the case. But it also might not last.

Generally, student loan forgiveness under IDR programs such as income-based repayment would be a taxable event for the borrower. In other words, the loan forgiveness amount could be treated as “income” to the borrower for tax purposes. This could have huge tax implications.

However, the American Rescue Plan Act — the stimulus bill passed by Congress and signed into law by President Biden last year — temporarily exempted the federal student loan exemption from federal tax. So the roughly 40,000 borrowers who will get near-immediate student loan forgiveness under Biden’s new IDR initiative won’t have to worry about federal taxes.

“The US Bailout Act included a provision temporarily changing the tax treatment of released student debt,” the Department of Education said. “Specifically, the law excludes from gross income eligible student loans that are discharged between December 31, 2020 and January 1, 2026. During this period, amounts of canceled student loan debt will not be subject to [federal] Taxation.”

Of course, this tax relief expires on January 1, 2026. For the relief to continue, Congress would have to pass an extension or make it permanent through new legislation.

Advocates applaud Biden, but call for more student loan forgiveness and other relief

Advocacy groups applauded Biden’s latest student loan forgiveness initiative and acknowledged the historic significance of the relief. But they also urged Biden to go further.

Some supporters have criticized the administration for not allowing periods of default to count towards the cancellation of IDR loans. “The income-contingent repayment promised that borrowers would not face unaffordable debt for life,” said Persis Yu, policy director and counsel at the Student Borrower Protection Center, in a statement. “Today, [the Education Department] have taken steps to start making this a reality, but… By failing to include the time borrowers have spent in default, they are still missing out on millions of borrowers for whom income-based repayment failed the most.

Proponents continue to push the administration to enact broader student loan forgiveness. “We are optimistic that this reform package will help many borrowers and families who felt student debt had become a lifelong burden,” Student Debt Crisis Center Natalia Abrams said in a statement. “However, in our role as advocates for student borrowers, we are intimately aware of how insidious this crisis is. Millions of people are in debt and a piecemeal political approach will not reach them all. To ensure that everyone impacted by the student debt crisis has the opportunity to thrive and achieve the American dream, we must largely cancel student debt now.

Education Department and White House officials have suggested that further relief remains under review. This includes a new IDR plan that could address at least some of the concerns expressed by student loan borrowers about the repayment options currently available, as well as additional executive action to globally forgive at least some amount of student debt. But so far, few details have been released.

In the meantime, borrowers can learn more about Biden’s latest IDR initiative here.

Further Reading on Student Loans

Who qualifies for student loan relief under Biden’s huge new income-based repayment expansion

Biden administration announces sweeping fixes to income-based repayment and student loan forgiveness programs

Forgiveness of student loans through executive action still on the table, says top Biden official

4 options for Biden to legally enact student loan forgiveness without Congress

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