Biden's Student Loan Forgiveness Plan: A Rollercoaster Ride to the Supreme Court and Beyond

The Biden Administration's ambitious plan to provide federal student loan forgiveness encountered a significant setback when the Supreme Court struck it down. This decision has far-reaching implications for millions of Americans who are burdened by student loan debt. The plan, announced on Aug. 24, aimed to cancel up to $20,000 in federal student loan debt for eligible borrowers.

The Forgiveness Plan: Who Was Eligible?

The White House announced that single borrowers earning less than $125,000 per year, or households earning less than $250,000, were eligible for $10,000 in loan forgiveness. Borrowers who fell under the income caps and received Pell Grants in college were slated to receive an extra $10,000, totaling $20,000 in forgiveness. Current students and borrowers who had federally held undergraduate, graduate, and Parent PLUS loans that were distributed on or before June 30, 2022, were eligible for the relief.

However, the plan was recently changed to no longer include borrowers who have Perkins loans or Federal Family Education Loans held commercially rather than by the Education Department. This could leave more than 4 million borrowers without relief, since they must have applied to consolidate those loans into a federal direct loan before Sept. 29, 2022, to be eligible for forgiveness, according to new guidance posted by the Education Department on StudentAid.gov. The plan originally gave these borrowers until Dec. 31, 2023, to consolidate and apply for the forgiveness.

The Supreme Court's Decision: A Major Blow

The Supreme Court's 6-3 decision, with conservative justices in the majority, effectively blocked the Biden Administration's plan. This means that millions of borrowers will need to begin repaying their loans in full on Sept. 1. The program’s fate is undetermined. The Supreme Court announced on Dec. 1 that it would hear arguments for and against the plan in February. The plan is blocked until then.

Justin Draeger, president and CEO of the National Association of Student Financial Aid Administrators, wrote in a statement: "Today’s decision will be difficult - if not devastating - news for millions of student loan borrowers nationwide who have had their financial futures held in limbo for nearly a year while this plan worked its way through the courts."

Read also: UCF Application Strategies

The Cost of the Plan

The Education Department estimated that the plan could cost taxpayers upward of $300 billion to $400 billion over the next decade. While the Education Department said it was confident in the legality of its forgiveness plan, its fate was ultimately decided by the Supreme Court.

Repayment Resumes: What to Expect

Along with those who will re-enter repayment, many other borrowers will be entering payment for the first time after their payments were paused for three years due to the pandemic. Loan payments are now set to resume 60 days after either the forgiveness program is implemented or the Supreme Court rules on the matter. The new extension, according to a statement from the Education Department, "will alleviate uncertainty for borrowers as the Biden-Harris Administration asks the Supreme Court to review the lower-court orders that are preventing the Department from providing debt relief for tens of millions of Americans."

Interest rates were placed at 0% during the payment pause but will return to their current fixed rates when repayment begins. John Pelletier, director of the Center for Financial Literacy at Champlain College in Vermont, says: "I think you’re going to see a really big increase in student loan delinquency some time in quarter one next year."

How Relief Was to Be Administered

The Education Department received 26 million applications after going live in October, White House press secretary Karine Jean-Pierre said after the Nov. 10 ruling. Now, visitors to the application page are greeted with a message saying, "Student loan debt relief is blocked.""Courts have issued orders blocking our student debt relief program," the message reads. "As a result, at this time, we are not accepting applications." Borrowers were asked to complete a few basic personal identification questions, including their Social Security number, and to review the eligibility requirements before signing and certifying the application. Borrowers did not have to attach any proof of documentation that they qualify, but they did sign the form acknowledging they will provide proof of income if asked.

The White House announced in its press release that nearly 8 million borrowers may be eligible to receive relief automatically because their income data is already available to the Education Department.

Income Eligibility

Borrowers would have had the choice to use either their 2021 or 2020 tax return information when applying for loan forgiveness, says Jared Walczak, vice president of state projects at the Tax Foundation, a nonprofit that focuses on tax policy. Even if borrowers have a single income above $125,000 or a household income above $250,000 at the time of the announcement, they can still qualify as long as their income in 2021 or 2020 was under the threshold, Walczak says.

For current students, the Education Department would have had income data for any borrowers who completed the FAFSA in 2021-2022, Walter says. For borrowers who were a dependent during the 2021-2022 school year, the Department of Education would have used parental income information to calculate loan cancellation eligibility.

Impact on Public Service Loan Forgiveness

In October 2021, the Biden Administration announced a limited-time waiver that relaxed eligibility requirements for the Public Service Loan Forgiveness program, which had faced criticism and investigations for its high ineligibility rates. Borrowers that worked in certain nonprofit and public service sectors for 10 years or more, even if not consecutively, might be eligible for all of their student debt to be canceled or get credit toward forgiveness. This, however, is separate from the one-time student loan forgiveness recently announced by the Biden Administration and will have no impact on a borrower's eligibility for either $10,000 or $20,000 in forgiveness, according to the NASFAA.

Public Service Loan Forgiveness Examples

Elena: A psychiatrist working at a state hospital in upstate New York for the last four years, who previously worked for a non-profit hospital in New York City for seven years, qualifies to receive credit for any past payments even if the payments were not on time or for less than the amount due. If Elena has made 120 monthly payments, then she would receive forgiveness through the time-limited changes.
Vishal: An elementary school teacher in Lexington, Kentucky, for the last three years, who previously worked for three years at a non-governmental organization (NGO) specializing in outreach and education for local farmers, can consolidate his Perkins Loans into a Direct Loan and count the 6 years’ worth of monthly payments towards forgiveness. But Vishal must apply to consolidate and apply to the PSLF program by October 31.
Carlos: After graduating from college, he went to work full-time in a bank in his hometown of Mobile, Alabama, for five years while making payments on his Federal Direct Loans. Carlos left the bank and went to work full-time for the City of Mobile as a Grants Manager where he has been working for the last ten years. Even if Carlos has not made 120 payments, he should still apply because he has been working for a qualifying employer and, under the temporary changes, he can count many of his prior payments toward forgiveness even if it wasn’t for the full amount or on-time.
Daniel: Graduated from college in 2012 and served in the United States Army and paid his student loans under the Federal Family Education Loan (FFEL) program on-time. In order to receive the full benefit of the temporary changes, he will need to apply to consolidate his loans into the Direct Loan program and apply for PSLF by October 31.
A borrower: During her time abroad, she was paying her Direct Loans every month. She returned to the United States for her Master’s degree, during which she was not working but was still paying her student loans. Upon completion of her Master’s, she took a job with the State of Colorado as a scientist where she has worked for the last four years and continued to pay her student loans. Under the temporary changes, even if she wasn’t on the right payment plan or did not make minimum, on-time payments, she would be eligible to receive the full benefit of PSLF having made 120 payments working for both qualified employers.

A federal, state, local, or tribal government agency is considered a government employer for the PSLF Program. The specific job that you perform doesn’t matter, as long as you’re employed by a qualifying employer. AmeriCorps or Peace Corps volunteer service does count. However, no other full-time volunteer service is eligible. Like other Direct Loans, Direct PLUS Loans are eligible for PSLF. Direct PLUS Loans are made to graduate and professional students.

What if Payments Were Made During the Pause?

Relief is capped at the amount of your outstanding debt, according to StudentAid.gov. For example, a student who made payments to bring their balance down to $15,000 but is entitled to $20,000 in forgiveness would only receive $15,000 in relief. The Education Department hasn't indicated that it will reimburse borrowers for payments made during the pandemic pause, Walter says. That said, borrowers can contact their loan servicer to request a refund for any payments they made since the pause began on March 13, 2020. Borrowers should be aware, however, that accepting a refund would result in that money being added back to the loan balance.

Tax Implications of Debt Relief

While debt forgiveness is ordinarily taxable income, it will not be counted toward federal income taxes as part of the Biden Administration's plan. The American Rescue Plan Act of 2021 allows canceled student loan debt to be federally tax-free through 2025, Walter says. However, in some states, borrowers could potentially have to pay state income tax on the amount of forgiveness they receive.

While most states align their state income tax codes with federal income tax codes for simplicity, adopting any changes made at the federal level, some states make changes or have entirely separate tax codes, Walczak says. At least seven states have statutes that could result in borrowers having to pay state income tax on their debt relief, barring any legislative change. Those states are Arkansas, California, Indiana, Minnesota, Mississippi, North Carolina and Wisconsin, Walczak says.

California does not tax student loan forgiveness if it is part of an income-based repayment plan, but other forms of loan forgiveness are subject to income tax, Walczak says. He says California legislators are planning to amend that policy to include similar provisions for federal student loan forgiveness.

Walczak says other states may make similar amendments to their tax laws in order to help those who receive forgiveness.

Legal Challenges to the Plan

The Biden Administration's plan faced numerous legal challenges, ultimately leading to its demise in the Supreme Court.

On Nov. 10, a federal judge in Texas struck down the Biden Administration's plan. District Court Judge Mark Pittman had written that the plan is “an unconstitutional exercise of Congress’s legislative power and must be vacated.” In his 26-page decision, Pittman said that the Heroes Act of 2003, which the president cited in taking the executive action to provide the loan forgiveness, doesn't provide clear authorization by Congress.

In late September, six states announced a joint lawsuit against the Biden Administration in an effort to stop the plan, alleging that the administration is overstepping its executive powers and that it would cause harm to the states. The first student loan debt relief lawsuit was filed by the Pacific Legal Foundation, a California-based libertarian group, on behalf of a borrower living in Indiana who argues the plan will cost him more than $1,000 in state taxes on canceled amounts, as Indiana is one of seven states that could potentially tax loan forgiveness as income. Another lawsuit, filed by Arizona Attorney General Mark Brnovich, argues that the student debt relief plan is unconstitutional and will interfere with his office's employee recruitment, hurt the state’s economy by reducing taxes collected and increase the state's law enforcement costs.

On Oct. 21, a federal appeals court issued an administrative stay that temporarily blocked the administration's loan forgiveness plan, which preceded the Pittman ruling. The Eighth Circuit Court of Appeals is considering the motion for the aforementioned six states. The current litigation puts into question whether the loan forgiveness plan can be implemented before January 2023, when student loan payments are set to resume after the pandemic-induced pause, or at all.

Alternative Avenues for Loan Forgiveness

While the Biden Administration's broad student loan forgiveness plan was struck down, other avenues for loan forgiveness remain available.

Public Service Loan Forgiveness (PSLF)

Borrowers who are employed by non-profits, the military, or federal, state, Tribal, or local government may be eligible to have all of their student loans forgiven through the Public Service Loan Forgiveness (PSLF) program. This is because of time-limited changes that waive certain eligibility criteria in the PSLF program. These temporary changes expire on October 31, 2022.

Income-Driven Repayment (IDR) Forgiveness

Most federal student loans are eligible for at least one income-driven repayment plan. Income-driven repayment (IDR) plans cap your monthly payments based on your income and family size. If your income is low enough, your payment could be as low as $0 per month. Depending on the IDR plan, the remaining balance on your loans may be forgiven after 20 or 25 years of repayment.

One-Time Adjustment to Fix IDR Loan Forgiveness

On April 19, 2022, Department of Education (ED) announced several changes and updates that will bring borrowers closer to forgiveness under IDR plans. ED will do a one-time adjustment to count any month spent in repayment, some deferment periods (prior to 2013), and some forbearance periods toward loan forgiveness. For some borrowers, these changes mean that they will receive additional years of credit toward loan forgiveness. If you have loans that have been in repayment for more than 20 or 25 years, those loans may immediately qualify for forgiveness.

Borrowers who have reached 20 or 25 years (240 or 300 months) worth of eligible payments for IDR forgiveness will see their loans forgiven as they reach these milestones. ED will continue to discharge loans as borrowers reach the required number of months for forgiveness. All other borrowers will see their loan accounts updated in 2024.

TIP: No student loan borrower will have to pay any fees to receive their credit toward forgiveness. If someone asks you to pay them to get you loan forgiveness, it’s a scam.

What Counts Towards the 20 or 25 Years Required for IDR Forgiveness?

Any months with time in repayment status (regardless of the payments made, loan type, or repayment plan).
12+ months of consecutive forbearance or 36+ months of cumulative forbearance.
Months spent in economic hardship or military deferments after 2013.
Months in deferment prior to 2013 (except in-school deferment).
Any time in repayment prior to consolidation on consolidated loans.

What Loans Qualify for the IDR One-Time Adjustment?

Only federal student loans managed by Department of Education (ED) qualify for the one-time IDR adjustment. Borrowers with Direct Loans or federally-managed FFELP loans will not have to take any action in order to benefit under the one-time account adjustment. Any borrower with ED-held loans that have accumulated time in repayment of at least 20 or 25 years will see automatic forgiveness, even if the loans are not currently on an IDR plan.

Borrowers with FFELP loans held by commercial lenders or Perkins loans not held by ED can benefit if they consolidate into Direct Loans. Borrowers must consolidate by June 30, 2024, in order to benefit from the one-time IDR account adjustment. Borrowers can apply for a Direct Consolidation Loan online or with a paper form.

TIP: Not sure what type of loan you have? Log into StudentAid.gov using your FSA ID and select “My Aid” under your name. That page will display information about your federal loan amounts, including whether your loans are Direct or commercial FFELP.

Tips to Achieve Forgiveness as Painlessly as Possible

Make Sure You Qualify: Use the PSLF Help Tool to figure out your next steps. Department of Education (ED) and is free to use. Submit the forms suggested by the PSLF Help Tool to document your qualifying employment and receive credit for your monthly payments.
Make Sure You Have the Right Type of Loans: Only federal Direct Loans can be forgiven through PSLF. If you have other federal student loans such as Federal Family Education Loans (FFEL) or Perkins Loans you may be able to qualify for PSLF by consolidating into a new federal Direct Consolidation Loan.
Keep Track of Your Payments: Check it regularly to make sure it matches your records. You do not have to make the 120 qualifying payments consecutively.
Understand the CARES Act Payment Pause: Paused payments count toward PSLF as long as you meet all other qualifications. You will get credit as though you made monthly payments. Visit ED for more information on the payment pause and PSLF.
Request Credit for Deferments and Forbearances: Deferments prior to 2013 and extended periods of forbearance will be automatically counted as qualifying payments. To request credit for shorter forbearances-less than 12 months in a row, or under 36 months altogether-file a complaint with the FSA Ombudsman.
You Can Appeal if You’re Denied: ED offers an online form to request your PSLF/TEPSLF denial be reconsidered. To prepare to fill out the form, gather information about the payments you believe should be counted. This includes the dates of these payments; tax information for your public service employer at that time; and digital proof of your employment and payments, such as W2 forms and letters or statements from the loan servicer.
Stay Out of Default: If your federal loans go into default, you will need to rehabilitate or consolidate them to get back on track to qualify for PSLF. Compare which option may be best for you.
Stay on Track for Loan Forgiveness: Public service employees can use these guides to make sure they are on track for loan forgiveness.

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