President-elect Joe Biden (Photo by Scott Eisen/Getty Images)
Joe Biden wants to cancel your student loans three different ways.
Here’s what you need to know.
Student Loans
President-elect Biden wants to cancel student loans immediately. Many student loan borrowers assume that Biden has proposed one way to cancel student loans. However, Biden has proposed three ways to cancel student loans. Here’s what this means for you and your student loans:
1. Student Loan Cancellation: Upfront
Biden has called on Congress to cancel $10,000 of student loans for every borrower as a result of the Covid-19 pandemic. For example, Congress could cancel student loans through standalone legislation, or by including student loan cancellation in a new stimulus package. While House Democrats included student loan forgiveness in the Heroes Act — a stimulus package passed last year — Congress hasn’t passed any stimulus package that cancelled student loans. Student loans were dropped from the new stimulus package. Biden also didn’t include student loan forgiveness in his latest $1.9 trillion stimulus package called the American Rescue Plan. It’s possible that Congress may cancel student loans in the new stimulus plan. Congress still needs to debate the provisions, so the contents of the stimulus package could be fluid. Whether included in standalone legislation or a stimulus package, the most likely amount of student loan cancellation is $10,000 (among the current proposals) and student loan forgiveness would be one-time and upfront.
2. Student Loan Cancellation: Future
Separately, Biden also wants to cancel your student loans in the future. This future student loan cancellation is in addition to upfront student loan cancellation. So, if Congresses passes both proposals, you could qualify for upfront student loan cancellation and future student loan cancellation. How? Biden wants to simplify income-driven repayment plans, which are available for federal student loan repayment and typically help borrowers who are struggling financially. First, Biden would make enrollment in income-driven repayment plans automatic (although you can opt out). Second, monthly payment would be capped at 5% of discretionary income (compared with 10-20% under current income driven repayment plans). Third, student loan forgiveness would be automatic after 20 years. Fourth, unlike current income-driven repayment plans, student loan forgiveness would be tax-free. This fourth change means that if you get $30,000 of student loan cancellation after 20 years, you would not owe any income tax on this student loan balance. Biden will likely turn to Congress to implement these changes.
3. Student Loan Cancellation: Public Colleges
Biden also wants to forgive student loans for students who attend two-year and four-year public colleges and universities. Biden also would extend student loan forgiveness to students who attend a private Historically Black Colleges and University (HBCU) or a Minority-Serving Institutions (MSI). There are several exceptions to this proposal, however. First, student loan cancellation is only available for tuition-related student loans, so this would exclude student loans for room and board, for example. Second, this proposal only applies to college student loans, so graduate school student loans would be excluded. Third, the proposal doesn’t apply to student loans from private colleges and universities. Fourth, you have to earn $125,000 or less per year to get student loan forgiveness. If Congress passes this proposal, which would effectively be a federal subsidy for states, this could reshape the future of higher education. However, as Congress prioritizes $2,000 stimulus checks, this could spell bad news for student loan forgiveness.
How to pay off student loans faster
What’s the best way to pay off student loans? There is no guarantee that any of these three proposals will become law. While Democrats control Congress, many are expecting student loan relief. However, student loan cancellation currently is not included in the new stimulus package, and it’s unclear given other economic priorities if or when student loan cancellation will become the focus. That’s why it’s important to understand your options for student loan repayment now. Start with these three options, all of which have no fees:
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