Your Student Loan Forgiveness Questions, Answered

By Jordan L. Turk, Smokeball legal technology advisor

More than 45 million Americans have federal student loan debt. This debt currently totals more than $1.6 trillion, a portion of which covers my law school loans. The government paused federal student loan repayments several times throughout the pandemic, but it looks like this reprieve is set to (maybe, finally?) end on December 31, 2022. But student loan forgiveness may also be on the horizon.

Many borrowers are left wondering (1) how they are going to resume payments on their loans; and (2) whether they will ever have a fair shake at paying off their debt. To help ease this burden, President Biden announced the creation of a loan forgiveness program. I sat down with Steven Chung, tax attorney and Above The Law columnist, to help answer everyone’s burning questions about President Biden’s student loan forgiveness program.

So, what exactly is this student loan forgiveness program that I keep hearing about?

Last August, President Joe Biden announced that the Department of Education would forgive $10,000 for holders of federal student loans held by the department. If the borrower received a Pell Grant, then he or she would receive $20,000 of forgiveness.

Who qualifies for forgiveness?

Holders of federal student loans. The most common of these are Direct Loans. Holders of the now defunct Federal Family Education Loans (FFEL) were also eligible so long as they applied for consolidation into Direct Loans before September 29, 2022.

How can you qualify?

In addition to holding federal loans, the borrower’s adjusted gross income on their 2020 or 2021 federal income tax must be less than $125,000.

Why do borrowers with Pell Grants get an extra $10,000 forgiven?

Students who have little to no income and who are not expected to get financial assistance from family are eligible for Pell Grants. So it is safe to assume that Pell grant recipients come from low income backgrounds.

What is the biggest complaint you are hearing about this plan?

I’ll give two complaints which seem to be equally big: The first is that it is not fair for those who sacrificed to pay off their loans in full. The second is that $10,000 or even $20,000 is not enough for those with particularly large loans and low paying jobs. For example, someone with $180,000 in loans with 4% interest will accrue $7,200 of interest per year. Forgiving $10,000 in principal will only reduce the interest rate to $6,800. Assuming the borrower is on an extended payment plan with minimal reduction in principal, the interest accrued will exceed the amount forgiven in a few years.

Has anyone taken legal action against the plan? What’s been the outcome?

There have been several lawsuits filed against the President and the Department of Education. They all claim that student loans forgiveness on a mass scale requires congressional authorization. Some have been filed on an individual level. But the most prominent lawsuit comes from the attorneys general of six states. All of them have been dismissed due to a lack of standing, which means that the plaintiffs have not suffered a harm that can be addressed by a court. But just recently, the Eighth Circuit Court of Appeals issued an emergency stay on loan forgiveness until they review the standing issue.

Are there any potential pitfalls borrowers need to consider before they apply for forgiveness?

Only a very small number of people might be better off by not accepting the forgiveness. These people are on the Public Service Loan Forgiveness (PSLF) program and are on track to finish their 10-year service in the near future. One of the lawsuits was filed by someone who claimed that since he lived in a state where the forgiveness is taxed, he would be financially worse off because under his current PSLF payment plan, all of his remaining federal loans would be forgiven tax free. So if you are on a PSLF payment plan and nearing the end of the 10 year service requirement, you may want to opt of out the forgiveness if you live in a state where the forgiveness income is taxed.

Is there a deadline by which to apply for forgiveness?

The official deadline to apply for loan forgiveness is December 2023. However, it is highly recommended that people apply as soon as possible because the rules may change without notice. For example, on September 29, 2022, the Department of Education no longer allowed loan forgiveness to those holding FFELs that are owned by a private entity even if they consolidated into federally held Direct Loans. Also, the uncertainty of future court decisions could mean that eligibility could be limited even further as time goes on.

Payments on loans are currently paused until December 31, 2022. Do you think this will be the last pause we get?

Most likely yes. In my opinion, the last extension was due to politics. The midterm election appears to be a toss-up and pushing the deadline to after election day could placate students and recent graduates who tend to vote Democrat. So it would be best to prepare for repayment as soon as possible.

What do you think is the crux of the student loan crisis?

It is complicated and there is plenty of blame to go around. Many schools raise tuition beyond the rate of inflation and have been blamed for hiring unnecessary administrators. Some parents understandably force their children to go to college without thinking about the financial consequences. The government issues student loans with no limits and they are nearly impossible to discharge in bankruptcy. Most college rankings systems do not reward schools that lower tuition. Prestigious companies and government organizations only recruit from certain schools which not only limits social mobility for those who don’t attend these schools, but also gives elite schools justification for raising tuition since they know students will pay it. Finally, some students are also to blame for borrowing more than what they actually need, and (in recent years) thinking that the government will eventually forgive student loans.

Change will be difficult and will take time. Laws will need to be changed. Parents and students will need to consider alternatives to college. And employers will need to have a more holistic candidate evaluation system and recruit from a variety of sources and from a wider group of universities.

What do you like about the student loan forgiveness plan?

Obviously, it means less money to pay, both up front and in the long run due to reduced interest payments. The forgiveness plan is also very simple, and implementing discharges can happen quickly once the legal issues are resolved.

What do you dislike about the plan?

My biggest gripe about this is that it might give many people the impression that there will be another round of loan forgiveness in the future. President Biden recognized the demand for loan forgiveness, making it a campaign promise in 2020. Democrats will be expected to provide more forgiveness if they want to be competitive in future elections. If that happens, what is the incentive to minimize borrowing if loans will be forgiven anyway? Students will borrow as much as they can – whether for educational purposes or otherwise. Parents will be less inclined to provide financial assistance and spend their money on retirement savings and other things instead. This will ultimately lead to a moral hazard which will ultimately be paid by taxpayers.

Overall, do you believe this plan is a boon to student loan borrowers? To the country?

Overall, for borrowers, student loan forgiveness is a boon. For some, it may not be enough to reduce their burden significantly, but it is better than nothing. I think it will have the most benefit to those who have lower debt loads who can use this to lower their payments or pay off their balances quicker.

As for the country, I see this being economically neutral rather than a boon. Since this lowers debt rather than providing cash, I do not think this will stimulate the economy nor make inflation worse, especially since repayments will begin next year. But in the long run, the government must take steps to control the cost of higher education and limit student loan distribution, or the costs will continue to be borne by taxpayers.

About Steven Chung

Steven Chung is a tax attorney in Los Angeles. In addition, he is a weekly columnist at the legal website Above The Law where he writes about taxes, student loans and law practice. He has been featured in Forbes, Law360 and Bloomberg. He can be reached at Twitter, Linkedin, or at his website stevenchung.biz.

About Jordan Turk

Jordan Turk is a family law attorney in Austin, Texas, and the legal technology advisor at Smokeball. She has authored many articles that you can find in various state bar publications and legal blogs. In addition, she presents CLEs to attorneys across the country on topics ranging from client relationships to trust account management. Follow her on LinkedIn here.