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Should You Count on Student Loan Forgiveness?

Published January 21, 2021

4 minute read

Devon Taylor

By Devon Taylor

Reviewed by Expert Riley Adams, CPA

Now that January 20 has come and gone, there’s a new Democratic administration in the White House. We don’t want to get bogged down in the politics of the transition. However, President Biden taking office has many Americans hopeful he will do something to address the staggering student debt problem the country is facing.

As of last Summer, the U.S. had accumulated over $1.6 trillion in student debt. Yes, trillion. With a T. As the job market stagnates and wages seem stuck in the 1970s, many current and former students feel helpless when it comes to their student loans. While highly progressive Democrat figures like Bernie Sanders and Alexandria Ocasio-Cortez have been public with their calls to cancel student debt, not everyone in the blue party totally agrees.

First Steps

President Biden immediately offered some short term help. One of his first official actions as President was to pause payments on all federal student loans and drop the interest rates to zero percent. That pause previously existed under the old President too, but was set to expire.

President Biden is also expected to ask Congress to immediately cancel $10,000 of debt for all federal borrowers. That might not seem like a huge help if you owe $100,000 or more, but it’s a start. According to Forbes, that $10,000 cancellation would actually erase student debt for more than 16 million people.

The administration hasn’t given details on how long the payment pause will last. [Edit: Until September 30, 2021, so far.] Presumably, they are waiting to see how 2021 plays out in terms of Covid-19 numbers and vaccinations.

Wait, Wasn’t It $50,000 in Student Debt Relief?

You may have heard the number $50,000 floating around the news and social media. Some Democratic Senate leaders have been pushing for this number, most notable Chuck Schumer and Elizbeth Warren. It’s possible that President Biden could issue an Executive Order to erase $50,000 of federal student loans for anyone owing. However, like most things political or financial, it’s a bit more complicated than that.

There are some suggestions that such an order wouldn’t pass legal challenges. The Supreme Court could declare the order unconstitutional, creating a huge headache for the new White House administration.

A Slow Process

Rather than try to force any further student debt relief with an Executive Order, President Biden is more likely to attempt to go through Congress. While the Democrats hold a razor thin majority in the Senate (50-50 with Vice President Kamala Harris as the tie-breaking vote), it’s still a slippery slope. Not all Democrats favor full scale student debt cancellation. On top of that, the plan would have to get support from at least nine Republican senators in order to avoid a filibuster attempt. Alternatively, the Senate Democrats choose to use a provision in a procedure called “Budget Reconciliation.”

Other Options

Regardless of what amount of student debt relief that President Biden can get passed, there are a few other things you should know about too. First, Biden has spoken about making changes to bankruptcy laws so that borrowers could potentially include student debt in the process. While declaring bankruptcy is always a tough financial choice. However, it could be an option for if you are deeply drowning in student debt.

Another option that has been floating around is expanding income-based repayment plans. In theory, that would recalculate your loan payments based on your current income. The goal would be to give you enough cash flow to still pay your bills, while also continuing to make a dent in your loan amount.

So What Should You Do About Your Loans?

For starters, everything we’ve talked about so far only applies to federal student loans. If you have private loans, you’ll need to figure out exactly what your repayment responsibilities currently are. If the repayment pause does apply to you, though, take advantage of it.

We would advise that you don’t make any unneeded payments right now. Not only because of the financial uncertainty of everything right now, but because the $10,000 cancellation could become a reality. If you have under $10,000 in student debt, any extra payments you send now could end up being forgiven entirely. That’s money you could have kept, potentially.

On the downside, there’s a good chance that $10,000 (or $50,000) in student loan cancellation could end up being considered income by the IRS. That would leave a lot of people with unexpected tax liabilities. If that cancellation becomes a reality, make sure you know all the details. Still, trading $50,000 of student debt for a $10,000 tax bill is a good deal every day of the week.

If you are required to keep making minimum payments, make sure you don’t miss them. That will impact your credit score and make future financial goals harder than they need to be.

Man looks at Student Loan Notice

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Devon Taylor

Managing Editor

Devon is an experienced writer and a father of three young children. He's simultaneously trying to build college funds and plan for an eventual retirement. He's been in online publishing since 2013 and has a degree from the University of Guelph. In his free time, he loves fanatically following the Blue Jays and Toronto FC, camping with his family, and playing video games.

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