As the Biden administration continues to evaluate options for enacting widespread student loan forgiveness, should you be doing anything now to maximize your potential future eligibility? Perhaps — but some actions may carry significant and lasting consequences. Here’s what to know.
Biden’s Student Loan Forgiveness Legal Review
In March, the White House announced that President Biden had asked Secretary of Education Miguel Cardona and his legal team to draft a formal legal opinion letter outlining potential legal authorities that could be used to enact widespread student loan forgiveness through executive action. The legal review, which is ongoing, is being conducted in conjunction with the Department of Justice, which has also been evaluating legal questions related to mass student debt cancellation.
Student loan borrowers and their advocates in Congress, as well as a diverse array of civil rights, labor, and consumer protection groups, have been engaged in a sustained campaign to convince President Biden to use executive authority to cancel student debt on a mass scale. But Biden has not yet endorsed this route.
Student loan legal advocates have argued that the Higher Education Act gives President Biden broad authority, via the Secretary of Education, to forgive student loan debt. A key provision of the statute provides the Secretary with the authority to “enforce, pay, compromise, waive, or release any right, title, claim, lien, or demand, however acquired, including any equity or any right of redemption.” Advocates argue that the plain language of this provision supports the conclusion that the President may cancel student debt without Congressional input. Borrower legal advocates have also noted that the HEROES Act, which President Trump and President Biden relied on to cancel billions of dollars in student loan interest, also provides the Secretary with authority to “waive or modify any statutory or regulatory provision applicable to the student financial assistance programs” in response to a national emergency.
But attorneys under former Education Secretary Betsy DeVos had concluded that neither the Higher Education Act nor the HEROES Act gives the president the kind of authority that advocates have been arguing is allowable. The Education Department, under DeVos, had argued that widespread student loan forgiveness would be contrary to Congressional intent, as lawmakers did not envision mass student debt cancellation when it passed either statute. The Department’s attorneys had concluded that “Congress appropriated funds for student loans with the expectation that such loans would be repaid except in very specific circumstances.”
If Biden Forgives Student Loans, Who Would Qualify?
Given that the Biden administration is still conducting its legal review, there is simply no way to know with any certainty whether President Biden will forgive student loans, and if so, who would be eligible. Biden has not expressed public support for cancellation of $50,000 or more in student loan debt, as advocates and many progressive Democrats in Congress have called on him to do.
Biden could potentially include some form of eligibility criteria for mass student loan forgiveness, but it is too soon to know what that may look like. The administration could restrict eligibility to borrowers based on their incomes, their loan balances, or the type of school or educational program that they attended. Biden could also limit eligibility based on the type of loans that a borrower has. But such limitations could make implementing broad student loan forgiveness difficult logistically. And without knowing any details about what mass student loan forgiveness would look like, borrowers are in a difficult position while they wait.
Should You Consolidate Your Student Loans To Qualify for Forgiveness?
If Biden enacts mass student loan forgiveness, eligibility could potentially be restricted to certain types of student loans. For instance, if Biden does wind up using executive action, he would not have authority under federal law to cancel private student loans. He would only have authority to address federal student loans under the Higher Education Act and the HEROES Act.
But even for federal student loans, there may be further limitations. For instance, 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 U.S. Department of Education). Other types of federal student loans, such as Family Federal Education Loan (FFEL) and federal Perkins loans, were excluded. Some existing federal student loan forgiveness programs, like Public Service Loan Forgiveness, are similarly limited to Direct loans.
Borrowers with FFEL and Perkins loans can consolidate their loans through the federal Direct consolidation program to convert these loans into a Direct loan. If Biden limits any future student loan forgiveness programs to Direct loans only, this could make Direct loan consolidation an attractive option for FFEL and Perkins loan borrowers, and some borrowers are considering preemptively consolidating their FFEL loans and Perkins loans, just in case. (Private student loans are not eligible for Direct loan consolidation).
But Direct loan consolidation can sometimes have significant downsides, including interest capitalization and a restart of the borrower’s repayment term, thereby erasing any progress the borrower may have already made towards their payoff date or loan forgiveness term. Biden recently used executive authority under the HEROES Act to expand the CARES Act’s collections suspension to include defaulted FFEL loans, demonstrating that executive action may not necessarily have to be limited to Direct loans only.
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, particularly for student loan borrowers who have good credit and fairly high income.
But refinancing federal student loans via a private student loan carries some risks, including a loss of consumer protections (like flexible repayment options, default resolution programs, and generous deferment and forbearance options), as well as access to federal loan programs like income-based repayment and loan forgiveness. And refinancing federal student loans now carries even more risks than normal. That’s because federal student loans covered by the CARES Act currently have a 0% interest rate until at least September 30, 2021 — borrowers are simply not going to get a lower rate from a private lender.
Furthermore, if President Biden does determine that he has authority to cancel 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 re-converted into a federal student loan. So refinancing these loans now could ensure that you would not qualify for any student loan forgiveness.
Should You File Taxes Separately From Your Spouse?
One big question regarding a potential Biden student loan forgiveness initiative is whether there would be eligibility limitations based on a borrower’s income. Biden and moderate Democrats have previously spoken publicly about concerns that mass student loan forgiveness would skew benefits towards higher income earners. For married borrowers, would spousal income come into play?
There is no way to know at this juncture, but we can look at a few programs for insight. For example, the Income-Based Repayment (IBR) plan factors in spousal income when determining a borrower’s student loan payment, but only when they file taxes jointly. If the borrower and spouse file taxes separately, spousal income is excluded. But that is not true for the Revised Pay As You Earn (REPAYE) plan, which factors in spousal income regardless of tax filing status.
Borrowers considering filing taxes separately “just in case” should be aware that filing separately can sometimes have significant tax consequences, so it would be prudent to first consult with a qualified tax advisor before changing your filing status.
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