As the Biden administration continues to assess options for enacting blanket student loan cancellation, should you be doing something now to maximize your potential future eligibility? Maybe – but some actions can have significant and lasting consequences. Here is what you need to know.
Biden Student Loan Forgiveness Legal Review
In March, the White House announced that President Biden had asked Education Secretary Miguel Cardona and his legal team to draft a formal legal opinion letter outlining potential legal authorities that could be used to enact a blanket annulment. student loans through executive action. The legal review, which is ongoing, is being conducted in collaboration with the Department of Justice, which is also assessing legal issues related to the massive cancellation of student debt.
Student loan borrowers and their advocates in Congress, along with a wide range of civil rights, labor, and consumer groups, have embarked on a sustained campaign to convince President Biden to use the executive power to cancel large-scale student debt. But Biden has yet to approve this route.
Student loan lawyers argued that the Higher Education Act give President Biden broad authority, through the Secretary of Education, to write off student loan debt. A key provision of the law gives the secretary the power to “assert, pay, compromise, waive or release any right, title, claim, lien or demand in any form, including any equity or right of redemption”. Lawyers argue that the plain language of this provision supports the conclusion that the president can write off student debt without a contribution from Congress. Lawyers for the borrowers also noted that the HEROES Act, which President Trump and President Biden relied on to write off billions of dollars in student loan interest, also gives the secretary the power to “ give up or modify any statutory or regulatory provision applicable to the financial situation of students. assistance programs âin response to a national emergency.
But lawyers for former education secretary Betsy DeVos had concluded that neither the Higher Education Act nor the HEROES Act give the President the kind of authority advocates have argued to be admissible. The Education Department, under DeVos, had argued that the blanket cancellation of student loans would be contrary to Congress intent, as lawmakers did not contemplate the massive cancellation of student debt upon passage. of either law. Department attorneys concluded that “Congress had allocated funds for student loans in the hope that these loans would be repaid except in very specific circumstances.”
If Biden forgives student loans, who would qualify?
Since the Biden administration is still conducting its legal review, there is simply no way of knowing for sure whether President Biden will cancel student loans and, if so, who would be eligible. Biden has not expressed public support for the cancellation of $ 50,000 or more in student debt, as advocates and many Progressive Democrats in Congress have called him to do.
Biden could possibly include some form of eligibility criteria for the massive student loan cancellation, but it’s too early to know what that might look like. The administration could restrict borrowers’ eligibility based on their income, loan balances, or type of school or educational program they have attended. Biden could also limit eligibility based on a borrower’s loan type. But such limitations could make it difficult to implement large-scale student loan forgiveness logistically. And without knowing the details of what a massive student loan cancellation would look like, borrowers find themselves in a tough spot while they wait.
Should you consolidate your student loans to qualify for forgiveness?
If Biden orders the massive cancellation of student loans, eligibility could be limited to certain types of student loans. For example, if Biden ended up resorting to executive action, he would not have the power under federal law to cancel private student loans. It would only have the power to process federal student loans under the Higher Education Act and the HEROES Act.
But even for federal student loans, there may be other limits. For example, the CARES Act – which Congress previously passed last year to suspend payments, interest, and collections on federal student loans – limited student loan relief to direct federal student loans only (loans issued directly by the US Department of Education). Other types of federal student loans, such as the Federal Family Education Loan (FFEL) and Federal Perkins Loans, were excluded. Some existing federal student loan forgiveness programs, such as public service loan forgiveness, are also limited to direct loans.
Borrowers with FFEL and Perkins loans can consolidate their loans through the Federal Direct Consolidation Program to convert those loans into a direct loan. If Biden limits future student loan cancellation programs to direct loans only, it could make direct loan consolidation an attractive option for FFEL and Perkins borrowers, and some borrowers are considering preemptively consolidating their FFEL and Perkins loans. , in case. (Private student loans are not eligible for direct loan consolidation).
But direct loan consolidation can sometimes have significant drawbacks, including capitalization of interest and a restart of the borrower’s repayment term, thus erasing any progress the borrower may have already made towards their repayment date or term. loan forgiveness. Biden recently used executive power under the HEROES Act to extend the CARES Act’s suspension of collections to include FFEL loans in default, demonstrating that executive action does not have to be limited to loans. direct.
Should You Refinance Your Student Loans?
Borrowers with high interest student loans may be interested in refinancing through a private lender. Refinancing a student loan can result in a lower interest rate and better repayment terms, especially for student borrowers who have good credit and fairly high income.
But refinancing federal student loans through a private student loan comes with certain risks, including loss of consumer protection (like flexible repayment options, default resolution programs, and generous deferment and forbearance options). , as well as access to federal loan programs such as income-based ones. loan repayment and forgiveness. And refinancing federal student loans is now even more risky than normal. This is because federal student loans covered by the CARES Act currently have an interest rate of 0% until at least September 30, 2021 – borrowers simply won’t get a lower rate from a private lender.
Further, if President Biden determines that he has the power to write off student debt through executive action, his authority would 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 back to a federal student loan. Refinancing these loans now could therefore ensure that you do not be eligible for a student loan discount.
Should you report taxes separately from your spouse?
A big question regarding a possible Biden student loan cancellation initiative is whether there would be any eligibility limits based on a borrower’s income. Biden and moderate Democrats have previously spoken publicly about fears that the massive student loan forgiveness would skew benefits in favor of higher incomes. For married borrowers, would the spouse’s income come into play?
There is no way to know at this point, but we can look at a few programs to find out more. For example, the Income Based Repayment Plan (IBR) takes the spouse’s income into account when determining a borrower’s student loan payment, but only when filing tax returns jointly. If the borrower and the spouse report their taxes separately, the spouse’s income is excluded. But that is not true for the revised Pay as You Earn (REFUND) scheme, which takes into account the income of the spouse regardless of the tax filing status.
Borrowers who plan to file taxes separately “just in case” should be aware that separate filing can sometimes have significant tax consequences, so it would be prudent to consult a qualified tax advisor first before changing your filing status.
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