Joe Biden (Photo by Win McNamee/Getty)
President Joe Biden, under extreme pressure from some of his constituents, has hinted at a possible student loan forgiveness plan within the next few weeks.
He has not provided details but has implied that anyone making over $125,000 will be ineligible for forgiveness. He has also stated he is considering forgiving $10,000 but not $50,000 as other politicians have demanded.
Keeping Law School Accessible When Federal Loans Fall Short
As federal borrowing caps tighten financing options for law students, one organization is stepping in to negotiate the terms they can't secure alone.
In light of this news, some finance experts are recommending that people should not pay their student loans until more information is released.
The stated reasons for forgiveness are to stimulate the economy, and help low-income individuals and families.
And Democrats want to at least pause repayment until 2023 in order to avoid angering their younger voter base before the midterm elections. But this might no longer be a concern because the possibility of Roe v. Wade being overruled might make them think hard before threatening to stay home on Election Day.
One problem with loan forgiveness is that some people might waste it. Some people will neglect to pay their loans and accrue additional interest and penalties as a result. This accrual, if neglected long enough, will grow to the point where it negates the forgiven amount. While this scenario may seem extreme, keep in mind that many people have not paid their loans in two years due to the moratorium imposed and extended by the past two presidents. So a number of these people will need to make lifestyle changes and may need some motivation.
How Checkbox’s ‘Legal Front Door’ Can Transform Your Workflow
Leveraging agentic AI to triage, prioritize, and automate the law department inbox.
So if the government is serious about forgiving student loan debt, it should not do so with no questions asked. Instead, it should come with certain conditions that incentivizes debtors to start repaying their loans. Here are a few that I would recommend.
Borrowers must get out of default. Unfortunately, some borrowers have defaulted on their loans for one reason or another. As a result, they may be subject to penalties, their credit will be negatively affected, and they may even be subject to collection lawsuits and wage garnishments. If they want loan forgiveness, they must rehabilitate their federal loans. In addition, some should be counseled about checking their balances on occasion and how to avoid default in the future.
Borrowers must enter into a repayment plan. This needs no explanation. Loan forgiveness should be a reward for those who start repaying their loans.
The government should provide a matching credit for payments made. Rather than forgiving the proposed amount up front, the government should provide a matching credit for every payment made until either the proposed forgiveness amount has been reached or the loan has been paid in full. The credit should be applied toward the loan principal and not to penalties or accrued interest. For example, if a borrower pays $100, the government should forgive another $100 from the loan principal. This may also incentivize some people to make larger payments in order to reduce interest in the long run. An exception should be made for those with balances equal or lower than the proposed forgiveness amount — these people should have their loans forgiven entirely without making payments.
Income limitations should be reconsidered. President Biden’s $125,000 income limitation on forgiveness supposedly ensures that only the truly indigent, not the wealthy, will be eligible for forgiveness. That might be fine if fairness and wealth redistribution are the goals of student loan forgiveness.
But as stated above, the purpose of loan forgiveness was to stimulate the economy and help the Democrats maintain their majority in 2023. If those are the main goals, the income limit will have to be increased. This is because $125,000 is considered middle-class income in some areas, particularly in states with high income and sales taxes. These areas tend to vote Democrat but they might feel alienated if they are left out of loan forgiveness. Among those earning six figures, 42% said they were living paycheck to paycheck, according to a recent survey.
Loan forgiveness is a sensitive topic. While some support it, others (including liberal voters) are against it. But if loan forgiveness is on the table, it should be implemented in a way that will motivate borrowers to start repaying their loans and do so in a financially responsible manner. Otherwise, the forgiveness will provide little to no benefit for people who default and rack up penalties and interest. And it could make inflation worse.
Steven Chung is a tax attorney in Los Angeles, California. He helps people with basic tax planning and resolve tax disputes. He is also sympathetic to people with large student loans. He can be reached via email at [email protected]. Or you can connect with him on Twitter (@stevenchung) and connect with him on LinkedIn.