Dec 17, 2020,10:30am EST|5,943 views
Robert FarringtonSenior ContributorPersonal FinanceI write about personal finance, college and student loan debt.
Can Joe Biden really erase student loan debt with the stroke of a pen? Senator Elizabeth Warren (D-MA) and Senate Democratic Leader Chuck Schumer (D-NY) think so, as Warren outlined in mid-September of this year.
According to the press release, the President already has the existing executive authority to cancel student loan debt, which is afforded by Congress. In other words, the measure would not need to be approved by the House or the Senate, meaning broad-scale loan forgiveness could be initiated almost right away.
Yet, Warren’s plan with other legislators does come with limits. The bold plan outlined by Warren, Schumer, and their colleagues ask for a newly elected President Biden to “use existing authority under the Higher Education Act to cancel up to $50,000 in Federal student loan debt for Federal student loan borrowers.”
They also suggest taking measures to ensure there is no tax liability for borrowers with their debts forgiven, whereas borrowers currently owe taxes on debts forgiven through student loan forgiveness schemes like income-driven repayment programs. By using executive action alone, it’s likely that borrowers may face tax bills on the forgiven debt without an act of Congress.
PROMOTED
“Even before the coronavirus pandemic plunged our economy into chaos, student loan borrowers were already in crisis,” said Senator Warren in the memo. “The President of the United States has the power to broadly cancel student loan debt, help close the racial wealth gap and give a big boost to families and our economy. It’s time to use this existing authority and permanently improve the lives of tens of millions of Americans.”
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Is Student Loan Forgiveness Via Executive Order Legal?
The question of the legality of sweeping student loan forgiveness by executive action isn’t cut and dry. Warren and her colleagues argue that we should recognize “the Secretary of Education’s broad administrative authority to cancel Federal student loan debt under the existing authorities of section 432(a) of the Higher Education Act of 1965 (20 U.S.C. 1082(a)).”
Calls on the President of the United States to take executive action also ask for the use of “existing legal authorities under such section 432(a), and any other authorities available under the law.”
However, many legal experts challenge the assertion that these acts pave the way for lawful student loan forgiveness.
Financial planner Ryan D. Brown of CR Myers & Associates says that, if the President were to unilaterally forgive some level of student loan debt among student loan debtors, the legality of the President’s power to do this would likely make its way up to the Supreme Court to be adjudicated.
“The main issue is whether the Executive branch’s constitutional powers can forgive student loan debt,” he says.
Brown also points out that legal scholars argue that federal student loan debt falls strictly within the purview of Congress’ commerce, spending or taxing powers, and that an Executive Order issued by the President would be an overreach of constitutional authority as a result.
Student loan attorney Michael Lux of The Student Loan Sherpa says he agrees that there is plenty of ambiguity when it comes to this issue.
Stepping past the legal analysis, Lux believes the political analysis of this question is also very interesting. For example, he points out that many on the left are calling for Biden to use an authority that he might have. However, Biden has set out to be a consensus builder and a unifier, so he might be unwilling to take this leap.
“Biden may call on Congress to cancel some debt. This is something Congress has the authority to do,” he says.
Lux also says he can imagine the chaos caused by an extended legal fight over an executive order on forgiveness. In this scenario, Biden says he is forgiving debt and he calls on loan servicers to act accordingly. But, what if the action is challenged in court? And what happens if the court rules against the legality of this executive action?
“How confused would borrowers be if the balance was erased and then restored?” asks Lux.
For this reason, he says he would be surprised to see Biden take this risky leap.
A More Likely Scenario
Some experts believe it’s considerably more likely a lower amount of debt will be forgiven, and potentially even in a new COVID relief bill. When it comes to what Biden’s Presidency could mean for your student loans, the Biden administration has proposed forgiving up to $10,000 per borrower in federal student loans instead of $50,000.
You may also face some income caps or hardship requirements in order to have any of your student loans forgiven, although no one knows for sure. For example, the HEROES Act, which the Biden administration has voiced support for, would only offer loan forgiveness for borrowers who could prove they are “economically distressed.”
With that being said, borrowers with most federal student loans should be satisfied that, at the moment, there are no payments due and there is no interest accruing on their debts until after January 31, 2021. Travis Hornsby of Student Loan Planner says that, while he doesn’t believe student loan forgiveness via executive order is likely to come to fruition, he does see the potential for an extension of this benefit.
“I do believe that President Biden will extend the student loan payment and interest freeze likely until sometime between March 31st and September 30, 2021,” he says.
In the meantime, all student loan borrowers can do is wait and see if any other relief measures will come into play.
David Adefeso, who is founder of Sootchy.com (a startup that makes it easier for families to avoid student debt with 529 plans), says that he also hopes the government takes steps to improve the tools it already has, including 529 savings plans.
They can do this by “creating an additional incentive by making them tax-deductible and allowing employers to deduct employees 529 plan matches,” he says.
Adefeso notes that this will cost the government in terms of tax revenue, but it will spread the pain over many more years rather than straight forgiveness.
“It will also give parents an incentive to save,” he says.
