There’s more rumor than news right now, but here’s what Biden can legally do and what he can’t – and maybe shouldn’t.

3 minute read

When Joe Biden is sworn on Wednesday as the nation’s 46th president, he’ll be on the clock for all his campaign promises. One of those was about wiping out student loan balances for thousands – or was it millions? – of Americans.

“It’s holding people up,” Biden said on the campaign trail. “They’re in real trouble. They’re having to make choices between paying their student loans and paying their rent, those kinds of decisions.”

Now Biden has to make some tough decisions. On the campaign, he promised to forgive…

  • $10,000 of federal student loan debt for all borrowers.
  • The balance of borrowers who attended public colleges or Historically Black Colleges and Universities earning less than $125,000 a year.

That was all left out of the latest economic stimulus plan, despite the fact, President Biden’s still in favor of it. Before moving forward with student loan forgiveness, he needs to consider these complications.

Will student loan debt become tax debt?

Forgiving student loans is easy compared to figuring out the tax implications. That’s because the IRS considers any forgiven debt to be “earned income” – which means it’s taxable.

How much? Forbes reported that you could owe 20 percent of your forgiven student loans.[1]

Biden has said he’ll fight to amend the current tax codes, saying, “Americans shouldn’t have to take out a loan to pay their taxes when they are finally free from their student loans.”[2] But rewriting complex tax codes takes time – and Congress needs to approve them. What are the odds of that happening in our current partisan climate?

Is the payoff worth the investment?

Student loans make up the second-highest consumer debt in the country behind mortgages.[3]

More than 44 million Americans carry a collective $1.6 trillion in student loan debt. Over 5 million of those borrowers are in default on those loans.

House Democrats in support of broad-based student loan forgiveness say it’s a simple way to ensure billions of dollars go back into the economy and help close the racial wealth gap.

Last month, Sen. Elizabeth Warren (D-Mass.) said student debt forgiveness is the “single most-effective executive action available to provide massive consumer-driven stimulus into our economy.”[4]

But new research from the nonpartisan organization Committee for a Responsible Federal Budget says student loan forgiveness wouldn’t be the best bang for the federal government’s buck and will only provide a small, short-term jolt to the economy.[5]

Biden’s plan will cost the federal government $1.5 trillion to increase cash flow by $90 billion a year, according to the report. The nonpartisan organization has also said the plan will add $27.4 trillion in national debt.[6]

Who will benefit from student loan forgiveness most?

One of the strongest arguments is to help Black borrowers who are disproportionately impacted by student loan debt.

Research from the University of Chicago reinforces the argument that blanket student loan forgiveness will help shrink the wealth gap between Black and white borrowers.[7]

According to Forbes, 20 percent more Black students take out federal student loans to pay for college than white students.[8] HBCU graduates typically take out 32 percent more in loans than students at other colleges.[9]Black student loan borrowers default five times more than their white counterparts.[10]

Two decades after graduating from school, the typical white borrower has paid down 94 percent of the debt. Black borrowers? They’ve only paid off 5 percent.[11]

“The student debt crisis is a racial and economic justice issue and we must finally begin to address it as such,” rep. Ayana Pressley (D-MA) said.

Research from the University of Chicago raises an alarming issue: The wealthiest Americans will benefit the most.

“Most of the benefits of universal loan forgiveness would largely accrue to higher income individuals,” the study says. “Households with higher earnings have larger balances because they are more likely to be college graduates.”

What can struggling student loan borrowers do?

Federal student loan borrowers can sign up for an Income-Driven Repayment Plan.

In a nutshell, student loan payments are tailored to what the borrower earns. University of Chicago study authors write:

“Income-driven repayment is the least expensive and most progressive policy we consider.”

Only 43 percent of college graduates are aware it’s available to them, likely because it’s a complicated program.[12]

Biden’s plan seeks to simplify the IDR loan forgiveness plan with the following updates…

  • Payments would be 5% of discretionary income – what you earn after taxes, housing, food, and other necessities.
  • The debt will be forgiven after only 20 years of qualified payments, which is five years less than the current plan.
  • The forgiven balance won’t be treated as taxable income the way it currently is.

Biden now has the majority support in Congress – but slim enough that his bill may not pass. Time will tell if he indeed uses executive order.


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About the Author

Joe Pye

Joe Pye

Joe Pye began writing about debt and personal finance more than three years ago while attending Florida Atlantic Univerisity, where he served as Editor-in-Chief of the student-run newspaper, the University Press. Before graduating with a bachelor's degree in multimedia journalism, Pye placed as a finalist for the Mark of Excellence award by the Society of Professional Journalists Region 3 for feature writing and in-depth reporting. Since taking a full-time position as associate editor at Debt.com in 2018, Pye has become a certified debt management professional who's applied what he's learned to his personal life by paying down more than $22,000 worth of combined credit card, student loan, auto and tax debt in less than two years. He maintains a frugal and debt-free lifestyle. Pye's goal is to uncover trends in the financial world and share his experiences to help readers stay out of debt.

Published by Debt.com, LLC