Student Loan Forgiveness in Limbo: What Borrowers Should Know

With the proposed student debt relief program mired and stalled in legal battles, it’s now revealed that erroneous notices of student debt forgiveness application approvals were emailed to about 9 million Americans. At this point, says Smith’s Samuel Handwerger, “the Biden administration might be asking themselves ‘Is the road to hell really paved with good intentions?’”

Handwerger adds: “Whether the intent has been solely to boost the economy and promote higher educational achievement amongst Americans or a veiled political ad for Democratic votes in the latest election, find me an economist that believes an educated population is not good for the economy and I will show you that Joseph Stalin's many 5-year plans really did succeed.”

Handwerger, CPA and accounting lecturer for the University of Maryland’s Robert H. Smith School of Business, gives more insights – especially for borrowers – in this Q&A:

What are the essentials to know concerning the legal challenges?

Handwerger: This boils down to two cases. First, in Texas, two individuals — backed by the conservative organization Job Creators Network Foundation — allege the forgiveness plan unfairly excludes them and shouldn't be allowed. The other suit, “ Nebraska v. Biden,” comes from a group of states — Nebraska, Missouri, Arkansas, Iowa, Kansas and South Carolina — claiming that the forgiveness would hurt them in the form of lost tax revenue. Normally, loan forgiveness results in taxable income for the individual whose loan has been forgiven. But based on the 2017 Trump Administration tax law, student loan forgiveness is not considered taxable income during the years 2018 thru 2025, after which that particular provision sunsets. Talk about a perfect storm of Republican and Democratic agendas.

With another pause on repayments, is there anything different this time?

Handwerger: Starting in 2020 under Trump, repayments for federal student loans have been in a state of suspended animation -- no payments and no interest accruing. President Biden now has extended this original pause seven times with this latest move. But unlike previous extensions which expired by easily decipherable due dates, this latest extension almost requires a college degree to fully follow. But to put it as simple as possible, payments restart 60 days after whichever of the following scenarios happens first:

• The lawsuits that have blocked the debt relief are resolved
• Debt relief is implemented
• The date is June 30, 2023

In other words, if the debt relief is not implemented or the lawsuits are not resolved prior to June 30, 2023, then 60 days after this date, payments start to become due again and interest accrual resumes.

Should borrowers make voluntary payments?

Handwerger: Regarding this freeze-of-interest tolling, making voluntary payments in the interim is not an economically smart move, as normally one would be better served to earn some short-term interest on the funds. Even with a moving-target restart date making such financial planning tricky, the smart money move still is not to make payments while the freeze remains on. Adding to the efficacy of this argument is that the months during the pause still count as months with proper payment for many federal loan programs, where unpaid principal after a series of years is ultimately forgiven.

How long before a resolution? What if Biden wins?

Handwerger: It will be interesting to see how Biden will handle the applications for debt forgiveness if it legally can be resumed. Currently, loan forgiveness applications are suspended, and the government is not accepting any more applications. Originally the end date for applying was scheduled to be December 31, 2023. But the wheels on the legal process could go very slowly if the Supreme Court enters the picture. All of this makes for a lot of uncertainty for the 43 million-plus Americans holding unpaid student loan debt. The loan relief, in its original form, did not apply to loans originating after July 1, 2022. So, taking on more student debt needs to be carefully considered, as it always should be. My query: Would a win allowing for the loan forgiveness after a protracted legal battle entice Biden to expand the loans available for relief? I can’t wait for further developments to find out.