Bonifield and Clary: Biden’s student loan forgiveness plan includes law school debt

Student debt — and efforts to reduce its collective strain on borrowers — is all over the news lately. On Aug. 24, President Biden and the U.S. Department of Education announced a new student debt relief plan that would cancel up to $20,000 of federal student loans for millions of eligible borrowers. This long-awaited plan also indicated the department would allow for a final extension of the student loan repayment pause through the end of the calendar year and usher in new income-based repayment options for federal student loan borrowers. The plan was finalized after months of deliberations as the Biden administration sought to balance concerns from a variety of higher education stakeholders, including advocates who lobbied for relief to be restricted to only apply to borrowers with undergraduate degrees. In its final form, the plan covers both individuals with undergraduate and graduate degrees, including law school, where graduate debt levels can easily top six figures. According to the White House, nearly 90% of student loan relief under the plan will be directed to borrowers earning less than $75,000. As many as 20 million borrowers may see their student debt balances entirely canceled under this policy.

Final student loan repayment pause

The Biden administration’s new policy will extend the pause on student loan payments through Dec. 31. Payments on federal student loans will resume in January. The initial pause on student loan repayments was initiated by the department at the onset of the COVID-19 pandemic in March 2020 and has remained in effect following multiple extensions granted by both the Trump and Biden administrations.

Student loan forgiveness

In addition to extending the payment pause, President Biden announced the department will cancel up to $20,000 for borrowers who are Pell Grant recipients and up to $10,000 for borrowers who are non-Pell Grant recipients. To be eligible for cancellation, a borrower’s annual income must be below $125,000 (for individuals) or $250,000 (for married couples or heads of households) for 2020 or 2021. Relief will be capped at the amount of a borrower’s outstanding debt. The policy will apply equally to borrowers who have left school and current students, so long as the loans were originated before July 1, 2022, which would cover most law students currently in their 2L and 3L years. If student borrowers are dependents, their forgiveness will be assessed based on their parents’ income.

Loans will be automatically forgiven for the nearly 8 million borrowers for whom the department already has the relevant income data. If borrowers are unsure whether the department has their income data, the Biden administration launched an application in mid-October for students to apply for forgiveness. The application is short, only asking for an applicant’s name, address, phone number, email address, date of birth and Social Security number, and only takes approximately five minutes to complete. The department will follow up with borrowers if it needs additional information.

Public Sector Loan Forgiveness

The Biden administration also plans to waive specific eligibility criteria for the Public Service Loan Forgiveness, or PSLF, program. Borrowers who have been employed by nonprofits, the military, or federal, state or local government for 10 years or more may now be eligible to have all federal student loans forgiven through the PSLF program, but only if they meet the PSLF criteria and apply by Oct. 31.

New income-based repayment plans

The newly announced program will also alter existing income-based repayment plans by lowering monthly loan repayments from 10% to 5% of a borrower’s discretionary monthly income for undergraduate loans; raising the amount of income considered as nondiscretionary; forgiving a borrower’s loan balances of $12,000 or less after 10 years of payments instead of 20 years; and covering a borrower’s unpaid monthly interest, thus preventing a borrower’s loan balance from growing so long as they make their monthly payments. The proposed changes to repayment plans will be published in the Federal Register as a notice of proposed rulemaking. The public will have 30 days to comment.

While there have been questions about the legality of the department’s decision to cancel student debt, the Office of the General Counsel in conjunction with the Department of Justice Office of Legal Counsel released a memorandum Aug. 23 justifying the plan. This plan comes on the heels of the department’s recent efforts to forgive wide swaths of student debt incurred by borrowers who attended ITT Technical Institute and several other institutions previously subjected to adverse regulatory actions. This effort is complemented by an expansive new borrower defense to repayment, or BDR, rule expected to be finalized this fall by the department. Under BDR, student borrowers who feel they have been defrauded or otherwise misled by their institutions can seek to have their loans forgiven outright. The department estimates this rule will result in more than $8 billion in student loan discharges. Under the draft rule, students will have the opportunity to seek forgiveness of their entire loan balances, with the department seeking to recoup these costs from the borrowers’ institutions.

Plan challenged in court

The first suit against the plan was filed in late September by Indiana resident Frank Garrison. Garrison argues that his tax liability will increase as a result of the plan and that Congress has not authorized the president “to unilaterally cancel student debt.” To combat Garrison’s claims, the department may have to argue that Congress clearly delegated authority to the department to forgive loans and implement each of the aforementioned policy initiatives. The U.S. Supreme Court recently addressed a similar issue in West Virginia v. EPA, holding that the federal government cannot act on economically significant policy without clear Congressional authorization. As for Garrison’s tax liability claims, the Indiana Department of Revenue has previously confirmed that student loan relief will be taxed as income for borrowers with forgiven debt, which means Hoosier borrowers seeking relief should anticipate a higher tax bill in the spring.•

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Jacob Bonifield is of counsel at Dentons Bingham Greenebaum in Indianapolis and is a member of the firm’s Economic Development department and Public Policy practice group. Madalyn Clary is an associate in Indianapolis and a member of Dentons’ Public Finance group. Opinions expressed are those of the authors.