This week, Senator Elizabeth Warren announced a major proposal for massive student debt relief. The plan could potentially result in the cancellation of billions of dollars of student loans, and could benefit tens of millions of student loan borrowers.
But not everyone would benefit from the proposal if it winds up being enacted (and that’s a big if). Furthermore, there are many burning questions about who, specifically, the program would benefit; how these benefits would be allocated; and whether there might be unintended negative consequences of student loan forgiveness for borrowers and their families. Here’s a rundown.
Would Private Student Loans Qualify?
While the vast majority of the $1.5 trillion in outstanding student loan debt is federal, there are hundreds of billions of dollars of private student loan debt that is crushing borrowers. Senator Warren did not specify whether her plan would apply to private student loans. However, it’s unlikely that it would, since the federal government probably does not have the authority to cancel student loan debt disbursed by private lenders (at least not without the buy-in of those lenders).
However, other student loan reforms could serve as workaround solutions. For example, loosening bankruptcy restrictions on the dischargeability of private student loan debt could allow struggling borrowers to eliminate their private loans through bankruptcy — and Warren has consistently supported such reforms to the bankruptcy code.
UPDATE / CORRECTION: Senator Warren’s team reached out to confirm that private student loans would be eligible under her proposal. Still, it is unclear what legal authority would permit this (unless the federal government would simply pay private lenders directly).
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Would Parent PLUS Loans Qualify?
Even if we assume that only federal student loans would be eligible for Warren’s debt forgiveness proposal, it does not necessarily mean that all federal loans would qualify. Warren has not specified, for instance, whether federal Parent PLUS loans would be eligible for cancellation benefits. Parent PLUS loans are unique loans where the parent of the student is the borrower, even though the loan is taken out for the benefit of the student. Parent PLUS loans typically have higher interest rates and fewer repayment options than federal student loans, which can make them particularly challenging for struggling older borrowers to manage and repay. It remains to be seen whether Parent PLUS borrowers would get relief under Warren’s plan.
How Would The Program Be Administered?
Right now we just have a policy proposal. We don’t have draft legislation or a proposed bill, and we certainly don’t have proposed regulations which would likely determine how the program would be administered. We know that Warren plans to base eligibility on income (people making between $100,000 per year and $250,000 per year would get less of a benefit, and people making over $250,000 would get no benefit at all). But how would income eligibility be determined, specifically? Would the borrower have to complete an application for forgiveness and submit a tax return? Who would make the determination? And would the loan forgiveness award come immediately, or be paid out in chunks or phases? Even if this proposal becomes law, we are years away from a formal procedure being established.
UPDATE / CORRECTION: Senator Warren’s team reached out to state that for most people, the cancellation would be “automatic” using data available to the federal government. (Still, the exact procedure and mechanism for this has not been established).
How Would Married Borrowers Be Impacted?
Given that Warren’s plan bases eligibility on income, married borrowers need to know whether the income eligibility would be based on the borrower’s income or the borrower’s household income. Currently, some income-driven repayment plans will base payments just on the borrower’s income, but only if the couple files taxes as “married filing separately.” Other income-driven plans consider the joint household income of married borrowers regardless of tax filing status. How would Warren’s proposal treat married student loan borrowers? Would married couples where both spouses have student debt be treated differently from couples where just one spouse has student debt? The answers could determine whether millions of borrowers would qualify — or be left out of Warren’s plan.
What Happens To Loan Not Forgiven?
Warren’s plan would cap student loan cancellation at $50,000. For borrowers who have a larger balance than that, we don’t know exactly how debt forgiveness would impact their repayment of the remaining balance. Would the partial loan forgiveness result in a restructuring of repayment terms, potentially yielding lower payments? Or would the monthly payments remain the same? Right now, making a lump-sum payment on federal student loans does not change the borrower’s monthly payments, but would put the borrower into a “paid ahead” status such that the lump-sum payment would be treated as an early payment of future bills. This has mixed impacts on borrowers, and that’s probably not the best outcome if that’s how Warren’s plan would work.
UPDATE / CORRECTION: Senator Warren’s Team reached out to state that under her proposal, borrowers could refinance their remaining student loan balances at lower rates.
Would There Be Tax Consequences?
Under federal law, cancelled debt can be treated as taxable income for the borrower. In other words, federal law requires that borrowers report a cancelled debt as earned income for tax purposes — and they then have to pay income taxes on that cancelled debt. There are certain exceptions to this rule. For example, borrowers who are insolvent (meaning their debts exceed their assets at the time of the debt cancellation) may not have to pay any taxes. In addition, certain programs such as the Public Service Loan Forgiveness program are exempt from this form of taxation. If Warren’s proposal becomes law, Congress would need to build in a specific tax exemption to the legislation. Otherwise, borrower’s may be looking at surprise tax bills of many thousands of dollars after they get the loan forgiveness benefit — which would be a disaster.
UPDATE / CORRECTION: Senator Warren’s Team reached out to state that under her proposal, this would be a tax-free form of loan forgiveness.