Should You Take Action Now To Write Off Student Debt Later?
As the Biden administration continues to assess options for adopting blanket student loan forgiveness, should you be doing something now to maximize your potential future eligibility? Perhaps, but certain actions can have important 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 an official legal opinion letter outlining potential legal authorities that could be used to enact a blanket surrender. student loans through executive action. The legal review, which is ongoing, is being conducted in conjunction with the Department of Justice, which has also assessed 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, labor and consumer rights groups, have embarked on a sustained campaign to convince President Biden to use executive power to cancel large-scale student debt. But Biden has yet to approve this route.
Student loan legal lawyers have argued that the higher education law gives President Biden broad power, through the Secretary of Education, to write off student loan debt. A key provision of the law gives the secretary the power to “enforce, pay, compromise, waive or release any right, title, claim, lien or demand, however vested, including any equity or right redemption ”. Lawyers argue that the plain language of this provision supports the conclusion that the president can write off student debt without congressional input. 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 “waive or modify any legal or regulatory provision applicable to the financial situation of students. assistance programs ”in response to a national emergency.
But lawyers for former Education Secretary Betsy DeVos have concluded that neither the higher education law nor the HEROES law gives the president the kind of authority that lawyers have argued is admissible. The Education Department, under DeVos, had argued that a blanket student loan forgiveness would be contrary to Congress intent, as lawmakers did not contemplate a massive student debt cancellation when it passed the ‘one or the other law. Lawyers for the department had 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 forgive student loans and, if so, who would be eligible. Biden has not expressed public support for canceling $ 50,000 or more in student loan debt, as advocates and many Progressive Democrats in Congress have called him to do.
Biden could potentially include some form of eligibility criteria for massive student loan cancellation, but it’s too early to know what that might look like. The administration could restrict eligibility to borrowers based on their income, loan balances, or type of school or educational program they attended. Biden could also limit eligibility based on the type of loan a borrower has. But such limitations could make it logistically difficult to implement a broad student loan exemption. And without knowing any details of what the massive student loan cancellation 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 a massive student loan discount, eligibility could be limited to certain types of student loans. For example, if Biden ends up using 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 limitations. For example, the CARES Act – which Congress 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 exemption programs, such as the public service loan exemption, 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 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, just 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 collections suspension to include defaulting FFEL loans, demonstrating that executive action need not necessarily be limited to just direct loans.
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 loan borrowers who have good credit and fairly high incomes.
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 deferral and forbearance options), as well. as access to federal loan programs such as income-based. loan repayment and forgiveness. And refinancing federal student loans is now even more risky than normal. That’s because federal student loans covered by the CARES Act currently have a 0% interest rate until at least September 30, 2022 – borrowers simply won’t get a lower rate from a private lender.
Additionally, 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. So, refinancing these loans now could ensure that you do not eligible for a student loan discount.
Should you file your taxes separately from your spouse?
A big question about 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 the massive student loan cancellation would hijack the benefits 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 watch a few shows to get a preview. 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 their taxes jointly. If the borrower and the spouse report their taxes separately, the spouse’s income is excluded. But this is not true for the Revised Pay As You Earn (REPAYE) plan, which takes into account the income of the spouse regardless of the tax filing status.
Borrowers who plan to file their taxes separately “just in case” should be aware that separate filing can sometimes have significant tax consequences. It would therefore be prudent to consult a qualified tax advisor first before changing your reporting status.
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