The Biden administration is cancelling $1 billion of student loans.
Here’s what you need to know.
In the ongoing debate over student loan cancellation, at least some borrowers will get student loan forgiveness. In a major announcement, the U.S. Department of Education will enact student loan cancellation for 72,000 student loan borrowers who previously had some student loans cancelled, but now will get full student loan cancellation. The Biden administration says the previous formula to cancel student loans in cases of fraud or school closure that was used in the Trump administration — which often created partial student loan forgiveness — was unfair to student loan borrowers.
Under a federal law known as the borrower defense to repayment, borrowers could get federal student loan cancellation if they attended a school that engaged in deceptive or illegal practices or closed suddenly. In 2016, the Obama administration issued new rules to protect student borrowers and get student loan relief. These rules existed as a form of consumer protection because absent these rules, student loan borrowers would still have to pay off student loans even if they didn’t find gainful employment after attending schools such as ITT Technical Institute or Corinthian Colleges.
Betsy DeVos: Student loan forgiveness is too generous
Former U.S. Secretary of Education Betsy DeVos said the borrower defense to repayment rules were too generous to student loan borrowers, awarding too much student loan forgiveness, and hurting taxpayers who footed the bill. Last year, attorneys general from 22 states, plus the District of Columbia, sued U.S. Secretary of Education in federal court over her decision to limit student loan forgiveness for students. DeVos rewrote the borrower defense to repayment rules so she could, in her words, strike a balance between the needs of students and taxpayers. DeVos says her student loan forgiveness rules would save taxpayers $11 billion over 10 years. Under the DeVos standard, student loan cancellation was not automatic, borrowers had to apply for student loan relief, and borrowers had three years to prove their claim of financial harm.
Easier to get student loan cancellation
U.S. Secretary of Education Miguel Cardona will replace the previous formula for student loan cancellation in cases of fraud with a new standard that will provide “a streamlined path” so borrowers can get full student loan cancellation. This decision to roll-back decisions (and create new policies) regarding student loans likely are the first of more to come. For example, in the history of income-driven repayment plans, only 32 student loan borrowers have ever received student loan forgiveness. In the coming months, expect additional policies that could advance rights for student loan borrowers and help with student loan forgiveness and even student loan cancellation. This could include, for example, improving income-driven repayment plans. The Education Department will also work to ensure that these borrowers remain eligible to get federal student loans and have their credit scores repaired, as necessary.
“Borrowers deserve a simplified and fair path to relief when they have been harmed by their institution’s misconduct,” Cardona said. “A close review of these claims and the associated evidence showed these borrowers have been harmed, and we will grant them a fresh start from their debt.”
Student loans and bankruptcy
Student loan borrowers also have been successful in gaining student loan discharge through the bankruptcy process. This student loan borrower, for example, got $430,000 of student loans cancelled.
Student loan servicers
Student loan servicers also could face increased scrutiny in the Biden administration. A federal judge recently found that Navient, which services $300 billion of student loans, misled student loan borrowers.
Tax-free student loan forgiveness
The new stimulus package, the American Rescue Plan of 2021, does not include any student loan cancellation for student loan borrowers. However, the stimulus bill makes any student loan forgiveness tax-free through December 31, 2025. So, if Congress or the president cancels student loans or you get student loan forgiveness through an income-driven repayment plan, you won’t owe any income tax on the amount forgiven.
Will your student loans get cancelled?
You may be wondering what this means for your student loans and whether your student loans will get cancelled. Today’s announcement signals an Education Department that is friendlier to student loan borrowers and that is open to student loan cancellation, particularly in cases of fraud. However, this is not the only student loan cancellation to expect. Biden still wants to cancel $10,000 of student loans immediately, which is separate from the announcement today to cancel $1 billion of student loans for 72,000 student loan borrowers. According to the latest student loan debt statistics, There are still 45 million more borrowers who collectively owe $1.7 trillion of student loan debt, many of whom are hoping for some amount of student loan cancellation. While wide-scale student loan cancellation may come in some form, it may take longer than expected. While there are various proposals for student loan cancellation, Democrats have not formulated a student loan forgiveness plan that Congress can pass.
Pay off student loans
As you navigate student loan repayment, here are some potential options to consider:
- Student loan refinancing (lower interest rate, lower monthly payment)
- Income-driven repayment plans (lower monthly payment for federal loans)
- Public service loan forgiveness (student loan forgiveness for federal loans)