Should You Repay Your Student Loans or Wait for Loan Forgiveness?

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By Mark Kantrowitz

January 7, 2021

Should you continue paying your student loans if there’s a chance for Biden’s student loan forgiveness?

During the payment pause and interest waiver, eligible borrowers could choose to continue making payments on their federal student loans. If they did this, the full amount of the payments would reduce the principal balance of the loan.

But, borrowers who expect to receive Public Service Loan Forgiveness were advised against making payments because it would just reduce the amount of forgiveness they ultimately received.

A similar situation arises with the possibility that the new President will forgive student loans.

Can You Count on Student Loan Forgiveness?

Even if Joe Biden implements student loan forgiveness, it is unclear what types of student loans will qualify for loan forgiveness, what types of borrowers will qualify, and how much loan forgiveness borrowers will receive.

Eligible student loans may be limited to just federal education loans and not include private student loans. Like the payment pause and interest waiver, eligible federal student loans might be limited to loans held by the U.S. Department of Education, excluding commercially-held loans in the Federal Family Education Loan Program (FFELP) and most Federal Perkins Loans.

Eligible borrowers may be limited to economically-distressed borrowers, as was proposed in the Heroes Act that passed the U.S. House of Representatives.

The amount of student loan forgiveness may be limited, to $10,000 or $50,000 per borrower, or tuition-related undergraduate student debt. Will the forgiveness be available to all eligible borrowers, or just those borrowers who owe less than the forgiveness limit?

Will there be income caps on who receives student loan forgiveness. For example, will loan forgiveness be limited to borrowers who earn less than $125,000 a year?

Given these uncertainties, borrowers should continue to make payments on their student loans, since they might not qualify for student loan forgiveness and might still owe some student loans even if they do qualify for forgiveness.

Student Loan Forgiveness Is Not a Done Deal

Generally, Democrats support student loan forgiveness while Republicans oppose it.

Democrats won two Senate seats in the Georgia runoff elections, yielding a 50/50 split of the U.S. Senate in the 117th Congress (2021 2022). Ties will be broken by Vice President-elect Kamala Harris, giving Democrats a simple majority in the Senate. Democrats retained a majority in the U.S. House of Representatives.

But, control of the House and Senate does not mean that Democrats can pass legislation implementing student loan forgiveness without Republican support.

Senate rules require a 60-vote supermajority to invoke cloture and cut off debate. Republicans will be able to use a filibuster to block legislation.

There are a few exceptions. Filibusters cannot be used to block judicial nominees and executive-branch nominees. Most legislation can be filibustered, with the exception of budget reconciliation bills. Budget reconciliation bills present a once-a-year opportunity to pass legislation without a filibuster. 

Budget reconciliation bills are required to cut the budget deficit. So, any inclusion of student loan forgiveness in a budget reconciliation bill must be offset with savings elsewhere.

But, there are limited opportunities for savings, and President-elect Joe Biden has an ambitious and expensive agenda, not just involving student loan forgiveness and free college tuition. His top priorities include dealing with the COVID-19 pandemic, rebuilding the economy, social justice and the environment.

Although the House of Representatives does not have filibusters like the Senate, the House Minority Leader can talk indefinitely. Nancy Pelosi used this in support of DACA when she was Minority Leader in February 2018. But, there is a limit to how long one person can speak, so this is not an effective technique for blocking legislation. 

This means the President will have to prioritize his proposals and scale back some of them.

Which Student Loan Forgiveness Proposals Will Be Enacted?

Joe Biden has seven student loan forgiveness proposals, including $10,000 in forgiveness per borrower, forgiving tuition-related undergraduate student loan debt (at public college, HBCUs and MSIs), reforming public service loan forgiveness (PSLF), restoring bankruptcy discharge of student loans, defense to repayment, and tax-free forgiveness after 20 years in a new income-driven repayment plan.

Defense to repayment can be implemented without legislative action, due to court rulings that require processing most claims under the old Obama-era rules. The U.S. Department of Education will not only process the pending claims, but also review claims previously denied by Secretary DeVos. The U.S. Department of Education can also agree to settlements of pending lawsuits initiated by Secretary DeVos. This can be done immediately. Changing the new regulations will require a new negotiated rulemaking process, which can take up to a year.

Bankruptcy discharge is among the least expensive proposals. In addition, the Biden Administration can reissue Obama-era guidance concerning when the federal government will oppose bankruptcy discharge petitions. That guidance was focused on saving the federal government money by not pursuing cases it would lose and cases where the cost of defending the case would exceed potential recoveries. However, the Biden Administration might decide to “build back better” by writing a stronger policy. When the Trump Administration rescinded the previous policy, they issued a request for public comment on potential changes to the policy. Many good ideas were proposed as part of the public comments.

Reforming public service loan forgiveness might get bipartisan support, as it is probably cost neutral and accomplishes certain Republican objectives, such as capping the amount of forgiveness per borrower and thereby eliminating moral hazard. Moral hazard occurs when a borrower borrows more than what they need, knowing that the debt will be forgiven.

All of the other proposals require Congressional action and are expensive. The tuition-related forgiveness is by far the most expensive. Next most expensive is the $10,000 in loan forgiveness per borrower. This is likely to be scaled back by limiting the student loan forgiveness to economically-distressed borrowers, by limiting the forgiveness to federal student loans held by the U.S. Department of Education and by limiting forgiveness to borrowers who owe $10,000 or less. The latter, for example, cuts the cost from $377 billion for federal loans to $75 billion, while still wiping out all federal student loan debt owed for a third of federal student loan borrowers.

Joe Biden’s proposal for a new income-driven repayment plan with tax-free loan forgiveness after 20 years of payments is also expensive. However, the tax-free part of the proposal is much less expensive than cutting the loan payments from 10% to 5% of discretionary income. Borrowers who have been in an income driven repayment plan long enough to qualify for loan forgiveness are likely to be insolvent. The IRS can forgive tax debt that results from the debt cancellation when the taxpayer is insolvent. The IRS could potentially implement tax-free forgiveness on its own, without legislation, like it did with the defense to repayment discharges. 

Extending the Payment Pause

The Trump Administration extended the payment pause and interest waiver twice, and Biden also extended it, so there is ample precedent, even though the interest waiver part of it has questionable legal authority.

The main open question is how long an extension will be pursued. Will the payment pause and interest waiver be extended until September 30, 2021, as was proposed in the Heroes Act that passed the House, or just until April 1 or April 30?

Will the President implement the extension by executive order, or will it be included in a new stimulus bill quickly enacted by the new Congress?

Seeking Common Ground

Progressive Democrats, including Chuck Schumer, who will become the new Senate Majority Leader, have called for Joe Biden to use executive action to implement large-scale student loan forgiveness.

Joe Biden is unlikely to use an executive order to implement widespread student loan forgiveness, and not just because of the questionable legal authority. He is a centrist and prefers a collaborative approach, working with both sides to get legislation passed. This will involve making compromises, which may further limit student loan forgiveness.

Since the Democratic control of the Senate is by the thinnest of margins, Democrats will need to exercise party discipline to pass legislation. Just one Democrat opposing legislation will be enough to derail it. This will give the Democratic Senators and the two Independents a lot of power to demand conditions for their support of legislation. 

Thus, passing legislation will require a lot of collaboration.

However, if the Republicans become the party of “no”, blocking Joe Biden’s entire legislative agenda, then executive action might be his only option. Even so, he is unlikely to forgive all student loan debt, but instead take a more targeted approach. 

With the possibility that the mid-term elections may change the balance of power in the House and Senate in two years, there will be pressure on both sides to reach compromise.

A good place to start:

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