Democrats are putting pressure on President Joe Biden to issue an executive order forgiving student loans before the midterm elections in November. Whether Biden has the authority to forgive everyone’s student loans debt is questionable. But it is clear that Congress can forgive student loans on a broad scale through legislation.
Currently, Democrats control both houses of Congress. So why are we not seeing Elizabeth Warren or Bernie Sanders proposing a $50,000 student loan forgiveness bill? It is likely because every Republican member of Congress is against outright loan forgiveness. And it is possible that some Democrats are against it as well, either because most of their constituents are against forgiveness or because they want provisions that ensure that only the financially needy will be eligible.
So if the Democrats in Congress want to pass a student loan bill, they will need support from some Republicans. But there is not a lot of discussion about what Republican politicians would want in a forgiveness bill. So let’s look at some loan forgiveness proposals that could appeal to Republicans based on what they traditionally support.
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Loan forgiveness for combat zone service. Republicans tend to be more receptive to giving benefits to the military. Active duty service members are already eligible for numerous student loan benefits. Their federal loans are eligible for full forgiveness through PSLF after 10 years of service. In addition, they get interest suspension and payment deferral if certain criteria are met.
One idea I’ve been hearing is to give immediate loan forgiveness (either fully or partially) to those who served in a designated combat zone. Greater consideration should be given to Purple Heart recipients who were wounded during battle although, if the injury is serious enough, they could be eligible for total disability discharge. Similar consideration could also be given to recipients of awards representing exemplary heroism such as the Congressional Medal of Honor, the Army Distinguished Service Cross, the Navy Cross, the Air Force Cross, and the Coast Guard Cross.
Tax breaks. Republican politicians love to give tax breaks, although sometimes to the wrong people. They may be open to tax cut proposals that would either minimize student loan debt upon graduation or incentivize early repayment of student loans instead of outright loan forgiveness.
Another idea is to amplify existing education tax deductions. For example, the student loan interest deduction could be doubled to at least $5,000 per year with higher income maximums. Also, principal payments should also be tax deductible.
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Finally, refundable tax credits should be given instead of income deductions as the latter benefits wealthier taxpayers in higher tax brackets.
Refunds. A common response to student loan forgiveness is that it is unfair to those who sacrificed and gave up other purchases to pay back their student loans. One proposed solution is to give refunds to these people.
The issue of who is eligible for refunds is complicated, probably even more so than who is eligible for loan forgiveness. For example, would someone who paid tuition in the 1960s and ’70s be eligible, even though their tuition costs were a fraction of the cost today? Also, how would someone prove that they sacrificed after graduation? And keep in mind that income documents like tax returns and bank statements are generally destroyed after seven years. So someone who graduated 10 years ago could have a harder time proving their financial position back then.
And issuing refunds would be very expensive for the government.
Generous loan forgiveness for work in rural areas. In general, rural areas have a shortage of lawyers, doctors, and other professionals. These areas also tend to vote Republican. So red state politicians might be open to a more generous income-based repayment and loan forgiveness program for those who work in rural areas for 10 years, similar to PSLF. However, unlike PSLF, they do not need to work for the government or a 501(c)(3) tax-exempt nonprofit entity. They can run a for-profit business and still be eligible so long as they primarily serve and reside in a rural area. Lawyers working remotely from their Santa Monica ocean-view penthouse will be ineligible.
Democrats will be wary as it will mostly benefit residents of red states. And some Republicans might also be skeptical. While red state rural areas will benefit, some may worry this may attract out-of-state carpetbaggers from bluer pastures that may one day change the political demographics of the area.
A viable student loan forgiveness bill will need to have some bipartisan support. This means that Democrats will have to include some provisions that will appeal to Republican tastes. Whether this will happen is anyone’s guess, but if a compromise can be reached, then chances are good that the resulting bill will become law.
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.