The average student loan balance for college graduates in the US is nearly $30,000 Although federal student loans payments were halted due to the pandemic, they will resume eventually.
After student loans payments are unpaused they will again be one of the biggest items on family budgets. Many families and individuals could benefit greatly from a policy to cancel or reduce student debt.
During his campaign, President Joe Biden described the changes he would make in student loan forgiveness programs and new proposals he intends to bring to them. These plans are what could affect you.
Let’s look at the Biden student loans forgiveness proposals made thus far.
Biden Student Loan Repayment Changes
The following steps were taken by President Biden to assist student loan borrowers.
Student Loan Forgiveness Tax-Free Federally
The American Recovery Act, the third round of stimulus legislation, was passed by President Biden. All student loan forgiveness will be exempted from tax until December 31, 2025. While he didn’t create new loan forgiveness programs, he made sure that all current student loan forgiveness and discharge programs are tax-free.
This applies to Federal loans, such as Direct and FFEL, as well as private student loan discharges.
Before this, only Public Service loan forgiveness or Disability Discharge were exempt from tax. This allows for other loan forgiveness such as income-driven repayment plans forgiveness.
This law does not address student loan forgiveness being taxed by the state. Since many states have not complied with previous laws, any loan forgiveness (even though programs like PSLF), may still be taxable at the state level.
Student loan borrowers can get a mortgage easier
President Biden requested that the FHA change the rules regarding mortgage lenders in order to make it easier to obtain a mortgage for those borrowers who have income-driven repayment plans.
The current rule is that the lender must use 1% or more of the loan amount for monthly payments if you are on an income-driven repayment program. What if your monthly payment is $0? This was a problem spot and we discussed it here: Getting a Mortgage on IBR or PAYE.
Biden has changed the rules so that if you have $0 monthly under IBR/PAYE, your lender will use 0.50% to calculate your monthly debt-to-income ratio. Although it isn’t as good as counting $0 it is better than counting 1 percent, which was what it was before.
Some Borrowers Get Discharged from Disability
Discharge can be difficult to understand but is very beneficial for those who are permanently or totally disabled. One of the “catches” to this program is that you might have to submit documentation during a 3-year monitoring period following your disability to show that you are still disabled.
Failure to submit the required paperwork will result in your loan being re-instated. Some borrowers claimed that they didn’t receive notices, or were unable to obtain their paperwork over the past two years.
President Biden reversed the reinstatement of student loans. This will provide relief for 23,000 Americans with disabilities and forgiveness.
Repayment Claims – Follow Up on Borrower Defense
Borrower Defense to Repayment allows borrowers who have been defrauded or deceived by their college to get their loans forgiven. The program has been plagued with problems for many years. Finally, the Supreme Court ruled that the program was legal, and the President had to process the claims.
But, Donald Trump and Education Secretary DeVos were clever. They processed the claims and then decided that $0 was due. They followed the Supreme Court ruling but did not provide relief for borrowers.
President Biden will change that by granting 100% loan discharges to borrowers who meet the requirements. This will help approximately 200,000 borrowers who have been negatively impacted by predatory lending. ITT Tech will have at least 115,000 beneficiaries.
Covid-19 Student Loan Relief
Executive Order, January 20, 2021, was his first act on student loans. President Biden extended the Covid-19 extension and 0% interest Federally-held student loans up to May 1, 2022.
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Biden Student Loan Repayment Proposals
Five main Biden student loan forgiveness programs are available. These were part of a larger higher educational plan. Here are the details about each.
1. Allow $10,000 per Borrower
Biden repeatedly supported the offer of $10,000 in forgiveness for all student loan borrowers since March’s pandemic. This could lead to total debt cancellation for those who owe less than $10,000 in student loans (which is more than a third of all borrowers).
This proposal is different from other Biden loan forgiveness programs. It does not depend on your employment status or repayment plan. It is possible to be exempted from the forgiveness program if your annual income exceeds $125,000.
Early December saw Senator Chuck Schumer indicate that President-Elect Biden was considering a Senate resolution, which was introduced by Senator Elizabeth Warren. He himself. The resolution calls for Biden’s executive action to cancel student loan debt up to $50,000.
The resolution has been supported by over 100 student and community advocacy groups. It differs from Biden’s more conservative support of limiting forgiveness to $10,000, which he has so far supported.
2. Revamp the Income-Driven Repayment Program (IDR).
Joe Biden also suggested a new Income-Driven Repayment (IDR), plan to replace the 4 IDR plans. The new plan would reduce monthly payments by 10% to 5% on discretionary income over $25,000.
This proposal has a key advantage: borrowers won’t have to pay any federal student loan payments (or interest) if their income falls below $25,000. After 20 years of payment, the remaining debt would be forgiven.
Last but not least, student loan forgiveness for current income-driven repayment programs may be subject to income tax. Biden has pledged to amend the IRS tax code so that loan forgiveness is tax-free.
3. Enhance and Supplement PSLF
The Public Service Loan Forgiveness program claims that you can forgive all of your student loans if you have worked for a qualified public service employer for at least 10 years. This sounds fantastic on paper. However, very few people have ever received forgiveness through the program.
September 2020: Only 5,069 of the 179,371 PSLF applications had been approved as of September 2020. This means that 174,302 applications were denied. This also means that less than 3% of applications are approved.
Biden proposes to create an easier program and rework PSLF. For public servants, the new program would provide up to $10,000 per year of forgiveness for up to five consecutive years. In five years, qualified borrowers could get $50,000 off their student loans forgiven.
Borrowers who have more than $50,000 in student loans may still be eligible for PSLF. To improve approval, Biden pledged to support the What can you do for your country Act of 2019. This bill would close many loopholes that have led to a high percentage of PSLF applications being denied.
4. Restore the Borrower Defence Rule
Many borrowers have been misled by colleges about student loans and education programs.
This is not the borrower’s fault. The rules were changed by the current administration so that only 4% of Borrower Defense and Repayment cases could be approved. These rules were made by “loopholes” that the Secretary of Education discovered in the policy. This included “we have to process applicants, but not authorize a specific amount”. Joe Biden proposes to restore rules that assist more people who were cheated by dishonest schools.
5. Permit The Private Student Loan Discharge in Bankruptcy
Joe Biden also proposes to repeal 11 USC523(a),(8). This exception is the U.S. Bankruptcy Code allows for the discharge of federal and private student loans.
It has been very difficult for borrowers to discharge their student loans in bankruptcy court. In 2015, the Obama-Biden administration attempted to repeal this section. Biden now promises to complete the job and enact this legislation during his presidential term.
Criticisms of Biden Student Loan Forgiveness Programs
A lot of American families would benefit from the cancellation of even $10,000 student loan debt. However, President-elect Biden’s opponents claim that such a broad debt cancellation would undermine the efforts of borrowers who worked hard to repay their loans.
Another argument is that this legislation would only benefit those who are already wealthy. This is because people who are financially secure are more likely to have attended top schools with the highest tuition rates and completed their degrees.
High school was the highest educational attainment for 28.1% of people aged 25 or older, according to Census.gov. Only 22.5% of those surveyed had completed four years of college. On average, people who have a bachelor’s degree earn more than those who don’t. The highest-paying jobs are also those with higher education.
Critics fear that allowing large student loan amounts to be forgiven would only increase America’s income and wealth gap. Many economists and politicians advise Biden to decline calls to raise the forgiveness limit from $50,000 to $50,000.
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College tuition isn’t getting cheaper. The average college tuition rate went up five-fold between 1985 and 2017. This is almost double the inflation.
It is easy to understand why so many are having trouble managing their student loans and are following the Biden student loan forgiveness recommendations. It could take some time before new student loan legislation is passed by Congress, barring any executive actions.
Federal borrowers may still be eligible for immediate student loan relief by IDR plans, applying for deferment or forbearance. Private loan borrowers may also be able to lower student loan payments by refinancing at a lower interest rate.