As the Biden administration continues to evaluate options for adopting widespread student loan Forgiveness, is there anything you need to do now to maximize your potential future eligibility? It is possible, but some actions can have serious and long-term consequences. Here’s what you need to know.
Biden Student Loan Forgiveness Legal Review
In March, the White House announced that President Biden asked Education Minister Miguel Cardona and his legal team to draw up a formal legal opinion outlining potential legal authorities that could be used to take broad measures to forgive student loans through enforcement action. The ongoing legal due diligence is being carried out in conjunction with the Ministry of Justice, which is also evaluating legal issues related to the massive write-off of student debt.
Student loan borrowers and their congressional advocates, as well as various civil rights, employment, and consumer protection groups, have engaged in a sustained campaign to persuade President Biden to use the executive branch to write off student debt en masse. But Biden has not yet approved this path.
Student Loan Attorneys argued that the Higher Education Act gives President Biden broad powers through the Minister of Education to forgive student loan arrears. A key charter provision empowers the Secretary to “enforce, pay, compromise, waive any rights, titles, claims, liens or claims, whether acquired, including any capital or any right of repurchase.” Advocates argue that the simple language of the provision supports the conclusion that the president can cancel student debt without Congress involvement. Borrowers’ attorneys also noted that the Heroes Act, which President Trump and President Biden relied on, cancel billions of dollars in student loan interestalso grants the secretary the authority to “revoke or amend any law or regulation applicable to student financial assistance programs” in response to a national emergency.
But lawyers for former Education Minister Betsy DeVos concluded that neither the Higher Education Act nor the Heroes Act empowers the president with powers that proponents argue is unacceptable. The Department of Education, led by DeVos, argued that widespread student loan forgiveness would be contrary to congressional intent, as lawmakers failed to envisage a massive write-off of student loans in any legislative enactment. The Department’s attorneys concluded that “Congress has allocated funds for student loans with the expectation that such loans will be repaid, except in very special circumstances. “
If Biden forgives student loans, who will be up?
Given that the Biden administration is still conducting legal due diligence, there is simply no way to know with any certainty whether President Biden will forgive student loans, and if so, who will be eligible to do so. Biden has not expressed public support for writing off student loan debt of $ 50,000 or more, as advocates and many progressive Democrats in Congress have urged him to do.
Biden could potentially include some form of eligibility criteria for forgiving massive student loans, but it’s too early to know what that might look like. The administration may limit the eligibility of borrowers based on their income, loan balance, or the type of school or educational program they attended. Biden may also limit eligibility for a loan depending on the type of loans the borrower has. But such restrictions can make it difficult to secure the logistics of forgiving education loans. And, not knowing the details of what the massive student loan forgiveness will look like, borrowers are in a tough spot while they wait.
Should I Consolidate a Student Loan to Get Forgiven?
If Biden decides to massively forgive student loans, loan eligibility could potentially be restricted to certain types of student loans. For example, if Biden did indeed resort to executive action, he would not have the authority under federal law to revoke private student loans… He would have the authority to consider federal student loans only under the Higher Education Act and the Heroes Act.
But even for federal student loans, there may be additional restrictions. For example, the CARES Act, which Congress previously passed last year to suspend payments, interest, and fees on federal student loans, restricts student loan exemptions to direct federal student loans (loans issued directly by the US Department of Education). Other types of federal student loans, such as the Federal Family Education Loan (FFEL) and Perkins Federal Loans, were excluded. Some existing federal education loan forgiveness programs, such as government service loan forgiveness, are similarly limited to direct loans.
Borrowers with FFEL and Perkins loans can consolidate their loans under the federal direct consolidation program to convert these loans into a direct loan. If Biden limits any future student loan forgiveness programs to direct loans only, it could make direct loan consolidation an attractive option for FFEL and Perkins borrowers, and some borrowers are considering proactively consolidating their FFEL and Perkins loans just in case. (Private student loans are not subject to outright consolidation of loans).
But outright consolidation of loans can sometimes have significant drawbacks, including capitalizing interest and renewing the maturity of the borrower, thereby erasing any progress the borrower may have already made with respect to the maturity or forgiveness of the loan. Biden recently used executive power under the Heroes Act to extend the suspension of fees under the CARES Act to include overdue FFEL loansdemonstrating that executive action need not be limited to direct borrowing only.
Should you refinance student loans?
Borrowers with high interest rates on student loans may be interested in refinancing through a private lender. Refinancing a student loan can lead to a lower interest rate and better repayment terms, especially for student loan borrowers who have good credit and a fairly high income.
But refinancing federal student loans through private student loan carries some risks, including loss of consumer protection (such as flexible repayment options, default settlement programs, and generous deferral and abstinence options), and access to federal lending programs such as income-based payments and loan forgiveness. And refinancing federal student loans is now even more risky than usual. This is because federal student loans, which are covered by the CARES Act, currently have a 0% interest rate until at least September 30, 2021 – borrowers simply won’t receive a lower rate from a private lender.
Moreover, if President Biden does determine that he has the power to cancel student debt through the executive branch, his powers will be limited to federal student loans only. Once a borrower refinances their federal student loans through a private lender, that refinanced loan cannot be converted into a federal student loan. Thus, refinancing these loans now can ensure that you not be eligible for student loan forgiveness.
Should I file my tax return separately from my spouse?
One big question regarding Biden’s potential student loan forgiveness initiative is whether there will be restrictions on benefits based on the borrower’s income. Biden and moderate Democrats have previously publicly voiced fears that the massive forgiveness of student loans would distort benefits in favor of those with higher incomes. Will family income matter for married borrowers?
It is impossible to know at this stage, but we can take a look at several programs for understanding. For example, an income-based repayment (IBR) plan takes family income into account when determining a borrower’s student loan repayment, but only when they file taxes jointly. If the borrower and spouse file taxes separately, household income is not counted. But this is not true for Revised Pay As You Earn (REPAYE), which counts household income regardless of tax return status.
Borrowers considering filing a separate tax return “just in case” should be aware that filing a tax return separately can sometimes have significant tax implications, so it would be prudent to consult a qualified tax advisor first before changing your filing status.