COVID bill could lead to student loan forgiveness
Fotis Dulos died from a suicide in January 2020 while facing murder, kidnapping and other charges in his estranged wife’s death and disappearance. He was accused of attacking her in the garage of her New Canaan home when she returned from dropping off their children at school the morning of May 24, 2019, according to arrest warrants in the case.WASHINGTON — After the American Rescue Plan waived taxes on canceled student loan debt, Senate Majority Leader Charles E. Schumer and progressive Democrats are ratcheting up the pressure on President Joe Biden to use executive action to immediately erase $50,000 in student loans for each borrower.
It’s a hugely expensive proposition that would greatly exceed other federal government assistance programs in size, but provide a boost to millions of Americans.
Biden has so far opted for a narrower proposal: canceling $10,000 of student loan debt for all borrowers and the rest of the debt for people who went to public or historically Black colleges and universities and earn less than $125,000 a year. The U.S. Department of Justice is conducting a legal review on how to use executive authority to do so, Schumer said this week.
But student loan debt is one area many Democrats hope they can push Biden farther left. They amended Biden’s $1.9 trillion COVID-19 relief bill to try to remove a potential impediment to wiping away student debt.
The American Rescue Plan, signed into law last week, makes all student loan forgiveness taxfree until 2025, including private and institutional loans. The move helps current borrowers who receive loan forgiveness during this period — applying to nearly 100,000 borrowers currently in repayment, Schumer said. It could also affect 72,000 borrowers who will receive loan forgiveness who were misled or defrauded by predatory, often for-profit colleges, the U.S. Department of Education announced Thursday.
But more importantly, Democrats believe it sets the stage for Biden to wipe away thousands of dollars in student debt per person.
“The student loan debt crisis was a financial bomb ready to go off well before the COVID-19 pandemic — and after thousands lost their jobs in the economic downturn, the fuse has been lit,” Sen. Richard Blumenthal, D-Conn., said in support of the Schumer plan. “Rising costs and predatory lenders have forced young people to mortgage their futures for a chance at a college education. We're urging the Biden Administration to take bold action right now and ease the burden for student borrowers.”
Forgiving student debt up to $50,000 per borrower, like Schumer and others have proposed, would cost about $1 trillion, according to Adam Looney, a former U.S. Treasury official and nonresident senior fellow at the Brooking Institution. That’s about half the cost of Congress’s last COVID-19 relief bill and more than what the federal government spent on housing assistance, welfare or Pell grants cumulatively from 2000 to 2019.
Limiting loan forgiveness to $10,000, as Biden has proposed, would cost about $373 billion, Looney found.
Schumer and Sens. Elizabeth Warren, D-Mass., and Bob Menendez, D-N.J., held a press conference Monday to again push Biden to wipe away $50,000 of student debt per borrower. Rep. Rosa DeLauro, D-3, is a co-sponsor of their legislation.
“Our nation is facing a student debt crisis with 45.7 million people owing nearly $1.7 trillion in federal student loans – more than credit card debt or car loans,” DeLauro said. “It is more critical than ever that we make education and loan repayment affordable for all Americans.”
Rep. Jahana Hayes, D-5, a former teacher, has supported proposals to erase $10,000 in student debt per borrower, but would back the proposals for $50,000, too, her staff said. Rep. John Larson, D-1, is also on board. He’s also introducig legislation to give people who complete service programs like Teach for America and Americorp credit toward schooling and loans or make their stipends non-taxable.
But some Democrats are not convinced erasing student debt alone should be the top priority. In statement, Rep. Jime Himes, D-4, said expected a “robust debate” over student debt forgiveness, but did not say whether he backed Schumer or Biden’s proposals.
“Any effort to truly break the debt cycle, however, must be paired with action on the Biden administration’s other higher education priorities,” Himes said. “This could include efforts to curb tuition growth, make community college free for all Americans, or expand and simplify forgiveness for public servants. Without those changes, students may take out loans with the expectation that they will be forgiven in the future, and colleges may continue to pass rising costs onto their students.”
Biden has already used executive action to extend a pause for federal student loan borrowers until at least October, giving borrowers a break from payments and accruing interest. Connecticut is also offering separate relief to people using private loan servicers.
When the federal government or a lender forgives a student loan under certain plans, that cancelled debt may be treated as taxable income under federal tax laws, leaving some students with an unexpected bill. In many states, the money is also subject to state income taxes. In Connecticut, that money can be taxed depending on a person’s adjusted gross income.
"The average student borrower who earns $50,000 in income would save approximately $2,200 in taxes for every $10,000 of forgiven student loans," said Warren of the change included in the American Rescue Plan.
The federal government will lose $44 million in tax revenue due to this temporary change, according to the non-partisan Joint Committee on Taxation.
Already, the American Rescue Plan, Biden's signature COVID-19 relief package, is expected to decrease federal revenues by $53 billion over the next 10 years and increase direct spending by $1.8 trillion, according to the non-partisan Congressional Budget Office.
Connecticut residents have some of the highest amounts of student debt in the nation. Per borrower Student loan debt in New England increased consistently from 2005 to 2015, the Federal Reserve Bank of Boston reported, with Connecticut residents topping the pack in 2015.
While New England residents did better than the nation on average on avoiding delinquency and defaulting on their debt, people who attended community colleges, non-traditional colleges or who came from low-income neighborhoods or minority communities were more likely to struggle with their debt and become deliquent on their loans, the Fed found.
Canceling student loan debt is part of a larger conversation about the affordability of college, as tuition climbs. Many conservatives have blasted the idea of spending billions to wipe out student loan debt, saying if people choose to go to college, they need to shoulder to the burden of higher education. The Republicans' ranking members of the Senate and House education committees did not respond to requests for comment.
Rachel Gentry, assistant director of federal relations at the National Association of Student Financial Aid Administrators, previously said that her organization has recommended that Congress “explore debt forgiveness options that are targeted to borrowers with the greatest need.”
But she also emphasized the need to double the maximum Pell grant, which now is $6,345, because the money does not need to be repaid.