On his first day of presidency, Joe Biden requested a debt payment suspension, which has helped millions of student loan borrowers. Based on the latest suspension extension, student loan borrowers will not be required to make payments till the end of September 2021.
Many borrowers were worried that if the suspension period ends in January, they will still not be able to repay the debt effectively. Hence, this announcement was great news for many debtors as they will have around 8 months to plan the repayment process.
However, the announcement also created confusion about the forgiveness claims. Joe Biden created expectations that he will deliver direct forgiveness to borrowers. Hence, borrowers wondered if the suspension is a part of a further forgiveness plan or it substituted any chances of debt cancellation?
Whether the forgiveness gets accessible or not, there is another threat that debtors should be aware of- tax. As attractive as it might seem, forgiveness can put you in a worse situation than the current one.
Direct Student Loan Forgiveness- is It Probable?
Currently, there are more than 40 million student loan borrowers all over the U.S. Their accumulated debt exceeds $1.6 trillion. Many borrowers struggle to make payments and default on loans. Even worse, after the pandemic weakened the economy, borrowers’ ability to repay the debt got the biggest hit. After such damage, it is not surprising that the Trump administration, and then the Biden administration, granted a non-collection period with no interest to help the borrowers to recover.
Yet, Biden took a step further and supported the idea of direct debt cancellation. Back in March 2020, he tweeted to show support for a minimum of $10,000 direct debt forgiveness per borrower.
However, at the same time, there are different parties supporting or going against the idea of a $10,000 cancellation. For example, the Education Secretary criticized the idea and viewed it as a “gift-giving” process by the government. On the contrary, some famous Democrats even mentioned the need for more than $10,000- $50,000- debt cancellation per borrower. They requested such a move to be present in the next economic stimulus packages.
No Forgiveness in the Short Run
It is true that Biden’s student loan plan included many other elements- like the restructuring of the Public Service Loan Forgiveness, move to Income-Driven plans, or reviving Borrower’s Defense rule while keeping the direct forgiveness option out. Hence, people started to question Biden’s support in his initial view of debt cancellation.
Some thought that forgiveness would be a part of the first moves of the President. Unfortunately, his proposed economic stimulus package worth $1.9 trillion in January does not involve forgiveness. The stimulus generally will bring $1,400 to each adult in addition to $600 received in December’s package, among other benefits.
Meanwhile, his pick for the National Economic Council- Brian Deese- noted that Biden still supports the debt cancellation idea and wants Congress to approve it.
In short, direct forgiveness is not on the horizon for the near future. If it is ever possible, it will take a long time for Congress to approve it.
Taxation in Debt Forgiveness
In some forgiveness opportunities, the eliminated debt is considered as an income. Hence, borrowers are required to pay taxes from the benefit they receive.
If you do not understand how bad taxation can be, keep in mind that Goldman Sachs estimated around 20% of the canceled debt to be the tax. In other words, if a borrower receives $10,000 forgiveness, the tax can be $2,000 roughly. Therefore, while borrowers will celebrate the government aid received, they should also think about meeting tax requirements.
In his campaign plan, Biden mentioned the need to eliminate the taxability of forgiveness received through Income-Driven repayment plans. It was noted that the tax code should be changed as borrowers should not be worried about tax payments when they are finally free of the debt. Hence, it can be expected that if direct forgiveness is ever achieved, Biden will also make it non-taxable. But, none is guaranteed.
It can be a good idea to save some money in case you are entitled to higher tax due to student loan forgiveness. When an individual cannot meet the taxation requirement, the Internal Revenue Service will start accruing interest and late fees to the initial amount.
What to Consider before the Forgiveness?
It is essential to develop a sound plan and a range of actions to take based on possible scenarios. In other words, borrowers need to understand their options and how to move on if they realize.
Private vs. Federal Borrowers
This direct forgiveness opportunity only applies to federal loans. Hence, if you own a private loan, you do not even need to worry if Congress will approve it or you will be required to pay a tax.
Look for Other Options
8 month long suspension period is a great opportunity for borrowers to think about their debt resolution plans. Till now, probably, you did not have time to search for alternatives and develop a plan. However, you do not need to repay the debt for 8 months. Hence, start searching for forgiveness or repayment opportunities.
Keep in mind that if you have federal loans, the government provides many options. Forgiveness programs like the Public Service Loan Forgiveness, Teacher Loan Forgiveness, or discharge opportunities are plenty.
Although private borrowers have access to a few options, they can also benefit from refinancing, consolidation, or debt settlement to get rid of the debt.
Get Expert Help
Whether it is a forgiveness opportunity, the repayment plan, or suspension period announcement, it always involves difficult financial terms and complex requirements. Hence, each news is challenging to understand for the borrowers. Especially if you are not aware of all the processes in government aid on student loans, you will not realize its implications on your debt.
For all these reasons, it is advisable to get help from third-party debt specialists, like those in Student Loans Resolved. Our experts have years of experience and can guide you in any relevant process to get rid of the debt.