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Last week, President Biden announced that the federal government would be forgiving a portion of student debt for those using federal loans to pay for college.

Many people have questions about this decision, so let’s break it all down.

Student Debt

Student debt is most prevalent among those aged 25 to 34. Among those carrying student debt, 67% of borrowers are under the age of 40, according to the New York Federal Reserve. Only 57% of balances are owed by those under the age of 40, so people with larger balances are likely older due to borrowing for graduate school.

 

 

 

How does all this break down by state?

student debt

Borrowers with the largest debt balances live in Maryland, Washington, D.C., and Georgia. Those living in North Dakota are carrying the lowest balances.

So, who does this decision affect?

According to the announcement, those making less than $125,000 per year for an individual, or $250,000 per year for married couples will have up to $10,000 of student federal loan debt forgiven.

Additionally, the Department of Education will provide up to a total of $20,000 of debt cancellation for those who have funded their education with a Pell Grant.

Pell Grants are financial aid provided to those who exhibit extreme financial need. Traditionally, they do not need to be paid back, as is the case with grants, so this one confuses me a bit. Those who receive Pell Grants are not required to repay them, so what debt is canceled for them? I need to hear more about this aspect of the decision.

The White House has projected that this debt cancelation plan will eliminate full debt balances for 20 million Americans and that 90% of the debt relief will go to people with incomes less than $75,000.

What about Parent PLUS loans?

Parent PLUS loans are federal loans available to parents to help pay for their child’s education. Parents who have received Parent PLUS loans are also eligible for the $10,000 cancellation.

Grad students too?

Yes. Grad students can qualify for the $10,000 cancellation if they hold federal loans. They will most likely not qualify for the $20,000 cancellation, as most Pell Grants are only for undergraduate degrees.

What about students currently in college?

Students who are currently still in college can still qualify for debt cancellation, provided their parents’ income is below the stated threshold to qualify, and if their federal student loan was taken out prior to July 1st. Loans obtained after this date are not eligible.

What if I already paid back my loans? Can I get a refund?

It depends. If you took out private student loans to pay for college, you are most likely out of luck. There was no provision made in this decision to provide for those holding private student loans.

If you recently graduated and have been paying back a federal student loan during the payment pause, you may be able to request a refund for payments made since March 2020, when payments to federal loans were paused during the pandemic.

Payment Pause?

Those who held federal student loans as of March of 2020 have had their payback payments paused since that date. This decision to cancel student debt also includes a provision to extend the payment pause which was due to expire soon, until the end of this calendar year.

How much is all of this costing?

The reported estimate is that canceling student debt will cost American taxpayers at least $300 billion. Estimates continue to rise as more details of the plan emerge, so stay tuned.

If I have part or all of my student debt canceled, will I be taxed?

It’s possible. The announcement has indicated that there will not be any federal taxes due on any received debt cancellation, but there are some states that may tax residents who receive the benefit. Thirteen states, to be exact. Residents living in those states who received student debt cancellation could receive a tax bill of between $300 and $1,100, according to CBS News.

The thirteen states who are considering taxing any student debt cancellation are Arkansas, Hawaii, Idaho, Kentucky, Massachusetts, Minnesota, New York, Pennsylvania, South Carolina, Virginia, West Virginia, and Wisconsin.

student debt

If you live in any of these states and anticipate receiving student debt cancellation, it is best to consult a tax expert regarding this situation when preparing your taxes.

Why was this decision made to cancel a portion of student debt?

A couple of reasons could be at play here. One, a campaign promise. You may remember back during the 2020 campaign, there was a lot of talk about education and debt forgiveness, and government-funded education. Elizabeth Warren and Bernie Sanders talked a lot about this issue.

During the campaign, then-candidate Joe Biden said: “I propose to forgive all undergraduate tuition-related federal student debt from two- and four-year public colleges and universities for debt-holders earning up to $125,000, with appropriate phase-outs to avoid a cliff.”

If you read that carefully, he didn’t exactly PROMISE it, but rather, PROPOSED it. But things said during campaigns tend to be seen as promises, so he was under pressure to make good on his statement. This decision isn’t what he originally proposed, but some see it as a step in the right direction.

Secondly, inflation. Under this current administration, we are seeing record inflation rates, rivaling those not seen since the Jimmy Carter administration in the 70s.

So the reasoning is that if people are relieved of the financial burden of paying back student debt, they will have more disposable income to pour back into a sluggish economy.

Is everyone in favor of canceling student debt?

Hardly. Some are very much in favor of it. Understandably, those most excited are those who qualify to have some of their federal student debt canceled.

I read that 57% of Harvard students are in favor of debt cancellation. I’ll bet they are! 🙂 Tuition at Harvard exceeds $50,000 a year. So yeah. I was actually surprised that number wasn’t higher, given the price of tuition these days.

Student debt

Some in favor of the decision have stated that if we have billions of dollars to give other countries in the form of foreign aid, why not help out our fellow citizens? That argument has some merit.

Some critics worry that it will increase tuition for future students because if students taking out federal loans now expect forgiveness, colleges will have no incentive to bring it down.

A lot of politicians have weighed in. Senate Minority Leader Mitch McConnell said, “President Biden’s student loan socialism is a slap in the face to every family who sacrificed to save for college, every graduate who paid their debt, and every American who chose a certain career path or volunteered to serve in our Armed Forces in order to avoid taking on debt.”

These folks were my first thought when this announcement came out. I had student debt when I graduated from college. I paid it all back. So I think of those who took on debt with the understanding that it is to be repaid.

I also really think of those who could not afford to go to college and didn’t want to go into debt, and so they told themselves it was something they could not have. They are now presumably in the workforce and paying taxes.

So now a person who couldn’t afford college and chose not to go into debt to do it is now paying off a debt for something they themselves were not able to have. Just think about that. Is that right?

Some critics of this decision have characterized it as a way to get votes for Democrats in upcoming midterm elections. Senator Mitt Romney said on Twitter, “Sad to see what’s being done to bribe the voters. Biden’s student loan forgiveness plan may win Democrats some votes, but it fuels inflation, foots taxpayers with other people’s financial obligations, is unfair to those who paid their own way & creates irresponsible expectations.”

This idea of a vote bribe is an interesting one. According to a fact sheet released by the White House, the federal student loan debt has reached $1.6 trillion among more than 45 million borrowers.

There are approximately 158 million registered voters in the U.S., so this debt cancellation can benefit about 28% of the voting population, assuming that all of them are registered voters. It is unlikely that every single one of them is a registered voter, but if this decision can affect up to 28% of voters, that works out to 44 million people. That’s a big number that could have an effect on election results. The most recent presidential election was decided by around 7 million votes.

So while some are definitely happy about the decision to cancel a portion of federal student debt, there are also those who worry about rising tuition prices, little to no effect on rising inflation, and the implications of doing this as a political move to gain votes.

Regarding the inflation situation, I have listened to people with student debt that is being canceled as they talk about what a relief it is to no longer be burdened by the debt. Now they can buy a home and other things they want. Um, if they have that money available to buy stuff, why not pay back the loans they agreed to pay back when they got them?

I’ve heard some complaining about what a financial hardship having student debt has been. Was someone able to convince them that they would go through life without financial hardship at times? If so, let me dispel that right now. 🙂 There may be times when you are very financially uncomfortable.

And as to spending that money on other things now, you can sometimes have it all, but you can’t always have it all at the same time. Maybe you aren’t able to buy a home until you pay off debt. Again, did someone convince these people that they were immune to these rules of the universe? 🙂

So these are some of the aspects of this decision that I question.

So is this all legal and will it hold up?

That is yet to be determined. The Supreme Court may not allow this measure to proceed. The Department of Education has been given tools by Congress by which to tackle student debt. One of those tools is the Heroes Act, which was enacted in the wake of 9/11.

This law gives the Education Secretary the authority to “waive or modify” any provision of the law applicable to student aid programs “in connection with war, military operation, or national emergency.” A national emergency is defined as any emergency defined as such by the president.

Since the pandemic was declared a national emergency, this may provide a path forward for this plan. If this action makes it to the Supreme Court, they will surely have a challenge as they examine the definition of “waive or modify” as it applies to the Education Secretary’s authority to cancel payments. They may also grapple with what constitutes a “national emergency” and “affected groups.” Should be fun. 🙂

 

I think my concern with this decision is the same as it always is when a president makes an executive decision to spend my money.

We must remember that WE taxpayers are the government and nothing happens or is “given” for free.

I read just yesterday that the government will no longer be able to make “free” Covid tests available by mail because the program has run out of money. Funny how that works. 🙂

To quote Margaret Thatcher (who was referring to socialism at the time) “Eventually you run out of other people’s money.”

In general, I’m not a huge fan of executive orders unless absolutely necessary. It just seems that they tend to be used to do something the Executive Branch isn’t sure they would get support to do from the Legislative Branch.

Checks and balances are part of our government for a reason. To prevent power grabs and enacting measures without involving Congress, which is supposed to represent we the people.

The Declaration of Independence states that “Governments are instituted among Men, deriving their just powers from the consent of the governed.”

None of us were given the opportunity to consent to this. I know I didn’t give mine.

It should be interesting to see how all this plays out. If you are in the process of figuring out how to pay for college, it can be very helpful to do your research. There are great books available and also workshops like The Scholarship System that teach you how to maximize your financial aid efforts.

I’d love to hear your thoughts on this topic. Feel free to share in the comment section!

And I’d love for you to follow me on Pinterest!

Student Debt

 

 

 

 

 

 

 

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