Do you have outstanding student loans? If so, you are not alone as over 42 million Americans of all ages have some balance outstanding. This post discusses what is going on with the movement to forgive federal student loans and how, if forgiveness is granted, it could impact you. As of the time of writing this post, there is no definitive date for governmental date action on this but the subject is getting plenty of discussion.
Framing the Issue
Here are the key facts as I see them:
Outstanding student loan debt (federally guaranteed and private loans) is approximately $1.7 trillion, according to Federal Reserve data.
Forgiving federal student loan (not private loans) debt was a major topic in the last presidential election with candidates debating taking action to forgive from $10,000 to $50,000 of loan debt.
According to the website studentloanhero.com 42.9 million people have a student loan.
The average 2019 graduate of private or public colleges holds an average of $28,950 in debt, according to the Institute for College Access and Success.
The average graduate reached a record in loan debt in 2019 for the first time since U.S. News and World Report tracked data. Loan debt is more than $6,000 higher on average than a graduate held 10 years prior.
On Day One in office, President Joe Biden signed an executive order extending a pause student federal loan payments enacted by the previous administration as part of COVID-19 relief.
President Biden has recently asked Education Secretary Miguel Cardona to prepare a memo on the president's legal authority to cancel up to $50,000 in student debt. Although Biden has expressed reluctance at bypassing Congress to forgive the loans, he's been under mounting pressure from members of his own party, borrowers and advocates to do so.
So what does all this activity tell us? I think it indicates that the odds of student debt forgiveness becoming a reality have never been greater.
The Key Debate Issues
The debate to final legislation or executive action will take place around the following issues:
Age. A growing number of Americans are bringing student loans into their old age. In fact about one-third of student loan borrowers over the age of 65 are in default, and half of those older than 75 have fallen behind, according to a report by the Government Accountability Office.
The type of job you have. This involves erasing the loans of people in certain professions where the contribution to society is high. This idea would focus the forgiveness on social workers, teachers, medical professionals or other professions that contribute to our social fabric.
Income level. Another proposal targets forgiveness at low-income Americans. According to recent studies roughly two-thirds of student loan borrowers in the U.S. earn under $100,000 a year. A third of borrowers make less than $50,000.
Should $10,000 or $50,000 be forgiven? This is the main point of contention. Studies have estimated that if all federal student loan borrowers got $10,000 of their debt forgiven, the outstanding education debt in the country would fall to around $1.3 trillion, from $1.7 trillion. And roughly one-third of federal student loan borrowers, or 15 million people, would see their balances reset to zero. Canceling $50,000 for all borrowers, on the other hand, would shrink the country’s outstanding student loan debt balance to $700 billion, from $1.7 trillion and the debt for 80% of federal student loan borrowers would be gone entirely.
Income Tax Ramifications of Loan Forgiveness
So if your loan is forgiven do you owe income taxes on the amount forgiven? The answer may vary depending on where you live. The recently passed $1.9 trillion American Rescue Plan Act of 2021 changed the federal income tax treatment of student loan forgiveness through December 31, 2025, making it tax-free, for federal income tax purposes. However, student loan forgiveness may be taxable in as many as 19 states.
According to a review of state income tax rules published on The College Investor website, student loan forgiveness is tax-free in 31 states. This includes 11 states with no state income tax and 20 states that automatically conform with changes in the Internal Revenue Code of 1986. Student loan forgiveness may be taxable in the remaining 19 states. If your loan is ultimately forgiven, please check your state income tax rules to make sure you are not the owner of a surprise payment.
Summary
The debate over student loan forgiveness will likely begin in earnest in the next few months. If you have outstanding loans you should stay close to the debate. The issues have many dimensions that impact a significant number of people in our country. The ever growing cost and need for higher education will not lessen in the near future. To get a reasonably paying job education and up-to-date skills are needed. These do not come cheap.
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