Student debt has been a major issue for years, but it is getting even worse due to the negative impact of the COVID-19 pandemic. Besides, President Biden’s favorable approach to direct student loan forgiveness created positive expectations for student debt. Hence, the issue is constantly in the attention of the media.
A few days ago, the government announced a new budget plan for the fiscal year of 2022. Once again, the student loan borrowers hoped for changes to help them eliminate the debt.
In short, there is still no forgiveness update, but the government aims to make education more affordable and increase equity among different groups of the population. Read this guide carefully if you want to know more about how budget allocation impacts student loan borrowers.
Why Do Debtors Expect Student Loan Forgiveness?
Back in March 2020, Biden tweeted to show his support for direct loan forgiveness- worth $10,000.
When he was elected, borrowers hoped that he would keep his favorable position and erase $10,000 per borrower. While Biden prolonged debt non-collection in his first days of Presidency, no news regarding the forgiveness was announced.
The silence of the government almost erased all the hopes that immediate forgiveness will be accessible. At that time, the White House Press Secretary tweeted to confirm that the President still supports student loan forgiveness.
Meanwhile, the Democrats, like Sen. Elizabeth Warren and Majority Leader Chuck Schumer, pressured the government to forgive not $10,000 per borrower but $50,000. They also insisted that the government should enforce this benefit through executive action, which requires no Congress approval. Warren noted that direct forgiveness is the only way for economic stimulus.
It was said that the President asked the Education Department to investigate if he can pass this bill without Congress’s approval legally. The President also noted that he does not have any authority to provide forgiveness without approval. He added that if Democrats want forgiveness, they should convince others and make this suggestion pass.
What is in the Budget Plan for Student Loan Borrowers?
A few days ago, a new budget plan for 2022 was announced and submitted to Congress. The budget is worth almost $6 trillion, which is the highest amount of spending since World War II.
The White House noted that they are dealing with big challenges, and hence, they need more money. The President aims to invest in education, health, research, families, and other foundational elements of the country through the proposed budgets.
1. Increased Pell Grant Award Amount
Following the goals for education, Biden aims to make it more affordable for students. In this way, fewer students will need to get student loans to finance their education. In the Biden-Harris campaign, specifically in “Plan for Education Beyond High School,” they demonstrated the need for higher amounts of Pell Grants. Pell Grants are awarded to students who showcase financial need. This year the highest award amount was around $6500.
Biden noted in the education plan that 50 years ago, the Pell Grants covered almost 80% of total expenses for a four-year degree. Nowadays, it can only cover 30% of the costs, making education expensive for poor people.
Biden keeps his promises, and in the budget, he proposed a $400 increase to the maximum limit of the grant. His original suggestion before being elected was doubling the amount, and this plan shows that he works toward the goal.
2. Providing Equity in Education
Not all groups of the population have access to the same level of education quality. Besides making education affordable, the government aims to create equity in education for different groups of people.
Hence, the budget plan involves investments in science and engineering programs, specifically in Historically Black Colleges and Minority-Serving Institutions. Moreover, the funds will be used to develop curriculum elements, increase access to research, mentorship, and fellowship, increase education capacity, etc.
What about Direct Forgiveness?
After Biden was elected, debtors held their breath to hear something about the loan forgiveness Biden supported. Unfortunately, that did not happen. Soon, Biden created an economic stimulus package to help the American economy. Again, people expected that there would be an update regarding the loan forgiveness in the economic stimulus packages.
Sure, the government offered help to American adults through direct payments, unemployment aid, investments in healthcare, rent assistance, etc. Yet, no news appeared regarding the forgiveness.
This time, borrowers hoped they would hear something regarding the direct loan forgiveness from the budget plan. Unfortunately, there is no element for loan forgiveness as a part of the budget plan. It seems like the debt cancellation will not be accessible in the short term.
Besides, the debates about the amount of the cancellation ($10,000 vs. $50,000) and whether the President should utilize executive or legislative action to enforce the forgiveness still continue. Getting forgiveness will not be easy before all these conflicts settle.
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Taxation of Forgiveness
In addition to all these challenges, it is still ambiguous how forgiveness will impact the borrowers and the economy in general. Forgiveness programs can be subject to taxes. It means, even if forgiveness is granted, the borrowers should ensure it will be tax-free. Otherwise, they will face a massive amount of tax which will make the forgiveness no sense.
For example, imagine you need to pay 20% of the forgiven amount. In other words, you need to pay an additional $2,000 from $10,000 for forgiveness which can be hard to afford. All these issues should settle before forgiveness. Therefore, it is reasonable to expect that there is a long way to go till direct forgiveness.
What did Biden do for Student Loan Borrowers since the Presidency?
Biden might not forgive the student loans yet, but he certainly delivered many benefits to student loan borrowers in the short period of his Presidency.
First, he started his Presidency with actions supporting the borrowers during the pandemic. At that time, experts expected that Biden would also prolong the debt forbearance period by a maximum of four months. Forbearance was one of the steps to help borrowers during the pandemic by stopping debt collection. However, Biden prolonged this period by eight months. As a result, borrowers are not required to repay their debts through September.
Borrowers’ Defense Rule
Before he was elected, as a part of the Biden-Harris campaign, he mentioned the need for reviving Borrowers’ Defense Rule. This rule protects the students that their schools misled. In many cases, the for-profit schools mislead the potential students to convince them to enroll. They lie about the true cost of education, quality, and components of the curriculum, or job replacement rates after graduation. In such cases, the Borrowers’ Defense Rule brings justice and eliminates the debt.
During Trump’s Presidency, Education Secretary DeVos did not favor this rule and called it “free money.” She believed that this program is unfair to taxpayers. Hence, the application reviews were delayed, and borrowers were rejected to get forgiveness. Besides, the discharge percentage calculation method had flaws, as some borrowers who qualified for forgiveness got 0% discharge for the debt.
Luckily, Biden showed his support for Borrowers’ Defense Rule in his “Plan for Education beyond High School.” He appointed a new Education Department Secretary, Miguel Cardona, who immediately granted 100% forgiveness to 100,000 borrowers who got partial discharge as a result of a successful application. The ED also announced that they are working to develop a new discharge percentage calculation method that is effective and fair.
What Should Borrowers Do?
We discussed the actions of Biden to help borrowers, the new budget plan, and its connection to loan forgiveness. However, the most important suggestion lies in what borrowers should do now.
First, it is advisable to stop waiting for government help, specifically in the form of direct forgiveness, to eliminate debt concerns. It seems that even if forgiveness becomes accessible, it will not happen soon. Therefore, instead of waiting for forgiveness, borrowers should develop their own debt resolution strategies. Considering that debtors are in forbearance period and do not need to repay the debt until September, there is a long time to think about debt management before repayment starts.
Rather than waiting for help, borrowers should check their options to get rid of the debt or at least decrease the debt obligations. Being informed about the loan programs, their requirements, student aid options gives a huge advantage to the borrowers and brings control over the debt challenge.
Federal loan borrowers can check the official Student Aid website, our blogs or get expert help from debt specialists, like those in Student Loans Resolved. Federal borrowers are lucky to have forgiveness and discharge options, as listed below but not limited to:
- Public Service Loan Forgiveness
- Teacher Loan Forgiveness
- Perkins Loan Cancellation/Discharge
- Borrowers’ Defense to Repayment
- Total and Permanent Disability Discharge
- Closed School Discharge, etc.
Besides, the borrowers can change their student loan repayment plans for more affordable payments. For example, Income-driven repayment plans calculate monthly repayment amounts based on the income level and family size. Hence, if the borrower earns less, he/she will pay less for the debt. In this way, debt repayment becomes easier.
What about Private Loan Borrowers?
Unfortunately, when it comes to private loan borrowers, they are not as lucky as federal loan borrowers in terms of student aid programs. Federally supported options mentioned above are not accessible to private borrowers. It is almost impossible to get forgiveness or cancellation for private loans.
However, it is still possible to reduce debt obligations for private borrowers. Specifically, student loan refinancing, if utilized at the right time, can be effective. Refinancing allows getting a new loan and using the proceeds to cover the existing loans. It will bring benefits if the new loan has lower interest rates. In this way, borrowers can save money.
Yet, before any decision regarding how to solve debt challenges, it is advisable to talk to a debt specialist. In Student Loans Resolved, you can get a free consultation with debt experts who have helped thousands of borrowers. Do not lose time by waiting for direct forgiveness and find your way to get rid of the debt sooner.