Earlier this week, the Biden administration announced a broad new program that will dramatically expand income based repayment programs. Tens of thousands of student loan borrowers will qualify for immediate student loan forgiveness, according to the Department of Education.
But the benefits of this new initiative may go far beyond the initial round of student loan forgiveness. The changes announced by the Biden administration may ultimately result in several million borrowers getting their student loans cancelled in the coming years. This makes this new initiative potentially historic in terms of its scope.
Biden’s New Student Loan Forgiveness Initiative Through Income Based Repayment Expansion
Income-driven 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 forgiven after 20 or 25 years, depending on the plan.
But the IDR system has been plagued by problems for years. Consumer advocacy groups and federal and state regulators have accused the Department of Education and its contracted loan servicers of mismanaging the program and misinforming borrowers, such as by not telling borrowers about IDR, or steering them into forbearances instead, which don’t count towards loan forgiveness and can cause runaway balance growth due to interest accrual. NPR recently revealed that the government and its contractors may not be properly keeping track of borrowers’ IDR payments. And a report released this week by the Government Accountability Office (GAO) suggested that hundreds of thousands of borrowers entitled to student loan forgiveness through IDR programs could ultimately be denied by 2030 as a result of this widespread mismanagement.
The new initiative by the Biden administration is designed to provide a “fix” to many of these problems. Under these new changes, the Education Department will be able to retroactively count past periods of repayment, as well as certain periods of deferment and forbearance, towards a borrower’s student loan forgiveness term under IDR. Here’s who qualifies.
Many More Borrowers May Receive Student Loan Forgiveness Under Biden’s New IDR Initiative
The effects of these fixes may be far-reaching. “Any borrower with loans that have accumulated time in repayment of at least 20 or 25 years will see automatic forgiveness, even if you are not currently on an IDR plan,” says the Department of Education in updated guidance released this week. While periods of default will not count towards a borrower’s 20 or 25 year term, all periods of repayment should count, and at least some periods of deferment and forbearance may count, as well.
Furthermore, the Department will be able to count payments made prior to loan consolidation. The Department “will count time toward IDR forgiveness, including… any time in repayment prior to consolidation on consolidated loans.” It is unclear whether periods of deferment or forbearance prior to loan consolidation will count, but even so, this is a significant development. Until now, consolidation would restart the borrower at the beginning of their repayment term, erasing any past progress towards loan forgiveness. The fact that the Education Department can now count repayment periods prior to loan consolidation will likely dramatically accelerate the loan forgiveness progress for many borrowers.
Student Loan Forgiveness is Tax Free Under Federal Law — For Now
Also noteworthy is the Biden administration’s actions come during a time when most student loan forgiveness is tax-free under federal law. That hasn’t always been the case. But it might also not last.
Typically, student loan forgiveness under IDR programs like Income Based Repayment would be a taxable event for the borrower. In other words, the amount of loan forgiveness 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 federal student loan forgiveness from federal taxation. So the estimated 40,000 borrowers who will obtain near-immediate student loan forgiveness under Biden’s new IDR initiative will not have to worry about federal taxation.
“The American Rescue Plan Act included a provision temporarily modifying the tax treatment of discharged student loan debt,” said the Department of Education. “Specifically, the law excludes from gross income qualifying student loans that are discharged between December 31, 2020, and January 1, 2026. During this period, the amounts of forgiven student loan debt will not be subject to [federal] taxation.”
Of course, that tax relief expires by 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 Cancellation And Other Relief
Advocacy groups applauded Biden’s latest student loan forgiveness initiative, and recognized the historic scope of the relief. But they also urged Biden to go further.
Some advocates criticized the administration for not allowing periods of default to be counted towards IDR loan forgiveness. “Income-driven repayment promised that borrowers would not face a lifetime of unaffordable debt,” said Persis Yu, Policy Director and Managing Counsel of the Student Borrower Protection Center, in a statement. “Today, [the Education Department] took action to start making that a reality— but… By failing to include time that borrowers have spent in default, they’re still leaving out millions of borrowers for whom income- driven repayment has failed the most.”
Advocates continue to push the administration to enact broader student loan cancellation. “We are optimistic that this set of reforms will help many borrowers and families who felt that student debt had become a lifelong burden,” said Student Debt Crisis Center Natalia Abrams in a statement. “However, in our role as advocates for student loan borrowers we are intimately aware just how insidious this crisis is. Millions of people are drowning in debt and a piecemeal policy approach won’t reach them all. To guarantee that everyone impacted by the student debt crisis is given an opportunity to thrive and access the American Dream, we must broadly cancel student debt now.”
Education Department and White House officials have suggested that further relief remains under consideration. This includes a new IDR plan that may address at least some concerns student loan borrowers have expressed about the currently available repayment options, as well as additional executive action to broadly cancel 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.