How Biden Is Impacting Student Loans in 2022
Since President Joe Biden’s administration announced its federal student loan forgiveness plan on Aug. 24, there has been a great deal of broad speculation about the specifics of his plan alongside a significant amount of enthusiasm from supporters.
However, the focus has recently shifted to a more critical tack, with some economists expressing potential pitfalls in the president’s forgiveness strategy — including adverse effects on borrowers’ credit scores, inflation, the federal deficit and potential state taxes imposed on borrowers.
As such, Republican lawmakers opposing Biden’s plan may also attempt to block it, making the actual execution of the president’s agenda an uncertain prospect.
Let’s take a quick look at Biden’s federal student loan forgiveness plan, considering some of its key elements.
How Much Student Debt Can I Get Cancelled?
The Biden administration announced it will forgive up to $10,000 in federal student loans in most circumstances, and up to $20,000 for Pell Grant recipients who meet certain income requirements. According to CNBC, 43 million borrowers may benefit from student loan forgiveness. A majority of these — more than 60% — hold Pell Grants. Roughly 27 million debtors may be eligible to receive up to $20,000 in financial relief, per the White House.
Borrower Eligibility and Income Limits
Biden’s loan forgiveness plan targets low- and middle-income borrowers. The administration has stated that almost 90% of loan relief will go to individuals who earn less than $75,000 a year. Anyone making over $125,000 (or $250,000 for a household) is not eligible for this loan forgiveness.
Types of Loans Affected
Approximately 37 million borrowers will be eligible for federal student loan relief. Only federal student loans are eligible. Loans from private banks and lenders do not qualify. Graduate and undergraduate loans are eligible for cancelation along with Parent PLUS loans taken out by parents or guardians, according to The Independent.
Refunds for Payments Made During the Loan Moratorium
According to the U.S. Department of Education’s Federal Student Aid (FSA) site, “You can get a refund for any payment (including auto-debit payments) you make during the payment pause (beginning March 13, 2020). Contact your loan servicer to request that your payment be refunded.”
State Taxes
According to Best Colleges, the American Rescue Plan does not consider any student loan forgiven between Dec. 31, 2020 and Jan. 2, 2026 as income and these will not be federally taxed as such. However, certain states may regard canceled student loan balances as taxable income.
According to the Tax Foundation, the 13 states that may stick loan relief borrowers with taxes are: Arkansas, Hawaii, Idaho, Kentucky, Massachusetts, Minnesota, Mississippi, New York, Pennsylvania, South Carolina, Virginia, West Virginia and Wisconsin.
Credit Scores, Inflation and Deficit Concerns
Further, some experts claim that the president’s plan may have unfortunate consequences on things like borrowers’ credit scores, the rate of inflation and the federal deficit.
As GOBankingRates previously reported, Raghunandan “Raghu” G — CEO and co-founder of Zolve — expressed that the absence of regular student loan payments in a borrower’s credit mix will hinder their overall score, and that Biden’s forgiveness plan will make it difficult for borrowers to build a strong credit history (and resultant score).
Others feel that the broad loan relief plan will have a detrimental effect on inflation and will basically work against the president’s recently enacted Inflation Reduction Act (IRA). The Committee for a Responsible Federal Budget (CRFB) claims that Biden’s student debt policy will likely boost the inflation rate by 15 to 27 basis points over the next year, and that it will “undermine the benefits of the IRA and demonstrate a lack of seriousness in addressing our nation’s economic challenges,” per an Aug. 26 statement. Suggesting otherwise, the Roosevelt Institute insists that the effects on inflation will be relatively small, per a previous GOBankingRates report.
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The cost of implementing Biden’s student loan forgiveness plan — and its effects on the federal deficit — are potentially significant. CRFB estimates that cancelling debt, extending the loan repayment until the end of 2022 and expanding the income-driven repayment (IDR) program could cost between $440 billion to $600 billion. The Wall Street Journal, using the “widely regarded” Penn Wharton Budget Model, reported a potential cost that may exceed $1 trillion.
Government officials, however, are adamant that the total cost will be much lower and that a deficit reduction of 1.7 trillion is already in motion for this year. This would mean the student loan forgiveness plan is “fully paid for,” according to deputy director of the National Economic Council, Bharat Ramamurti, who spoke at a press hearing on Aug. 26.
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