What Joe Biden’s election could mean for student loans

(Amr Alfiky | The New York Times) President-elect Joe Biden speaks at The Queen theater in Wilmington, Del., on Nov. 9, 2020. The incoming administration has proposed a series of changes that could affect more than 42 million student loan borrowers.

The federal government is the primary lender for students who borrow money for college and graduate school, and the Education Department directly holds more than $1.4 trillion in student debt. President-elect Joe Biden’s administration will have the ability to make changes that can directly affect millions of borrowers' monthly bills.

Here’s what you need to know.

Student loan pause

Some 22 million borrowers of federal student loans have had their monthly payments temporarily paused and interest waived through the end of the year because of the pandemic — a suspension of payments on debt totaling more than $900 billion — and they’re anxious to learn if the relief will continue into 2021.

President Donald Trump, through an executive action, already extended the so-called administrative forbearance through Dec. 31. (It had been scheduled to expire Sept. 30 under an emergency legislative package.) But it’s unclear whether he plans to provide another extension before Biden takes office in late January. A spokeswoman for the Education Department declined to comment. Biden’s transition team also declined to comment on its plans.

[Read more: Meet the former Utah teacher on the short list for education secretary under President-elect Biden]

Congress may feel pressure to act before the year ends, policy experts said, and it could include an extension in a new stimulus package or other legislation.

“For millions of borrowers, the fallout from the pandemic is still raging,” said Seth Frotman, executive director of the Student Borrower Protection Center, an advocacy group. “The thought that their student loan payments will be turned back on and they will get money taken out of their account via auto debit, or they will see their wages garnished once again — the results will be cataclysmic for their finances.”

Student debt cancellation

The higher-education platform Biden campaigned on was noticeably silent about a proposal that progressives say is ripe for executive action: outright cancellation of some student debt.

The Higher Education Act of 1965, which created the federal student loan program, authorizes the education secretary to “compromise, waive or release” federal student loan debts. Some legal scholars and key lawmakers believe that language gives the president the power to use an executive order to direct the Education Department to broadly discharge debts for any or all student borrowers. Others disagree and believe such an action would face legal challenges.

Sens. Elizabeth Warren of Massachusetts and Chuck Schumer of New York, both Democrats, have called for the next president to cancel up to $50,000 in debt per borrower. But Biden has never publicly endorsed the idea, and two people involved in his transition-planning discussions said his views had not changed. Without legislative action by Congress — which is unlikely if Republicans retain control of the Senate — broad student debt cancellation seems improbable.

Biden stirred excitement among student borrowers with a tweet in March that endorsed a pandemic-relief proposal from Warren and other lawmakers seeking cancellation of at least $10,000 in federal student loan debt per person. However, that proposal called for Congress to authorize such relief — and so far, it has not. Without legislative action, Biden may be reluctant to jam through a measure with a price tag of around $420 billion.

Income-driven repayment plans

Roughly 8.5 million federal loan borrowers are enrolled in income-driven repayment plans, which try to help struggling debtors by linking their monthly loan payment to how much they earn. There are four plans to choose from, but advocates say they’re not always affordable for the most vulnerable borrowers.

Biden proposed a more generous option: Individuals earning $25,000 or less annually will not owe any payments on their undergraduate federal loans, nor will they accrue interest. All other borrowers will pay 5% of their discretionary income — what remains of their paychecks after accounting for basics like food and housing — over $25,000. That’s compared with the 10% to 15% of discretionary income required by plans now. (One plan demands 20%.) Under Biden’s plan, any remaining balance would be forgiven.

Biden also promised to go further: Erased debts are generally taxed as income, but he said he planned to change that. Making a permanent change to the tax code would require legislation, but tax experts say there are other ways to eliminate the tax penalty.

Public service loan forgiveness

The enormous problems associated with the federal Public Service Loan Forgiveness program are well documented. The program was created in 2007 to attract workers to low-paying government and nonprofit jobs in exchange for debt forgiveness; after a decade of on-time monthly payments, any remaining debt is wiped away. But borrowers have to be in the right type of repayment plan and have the right kind of federal loan, all while working in a qualifying position — and only 2.2% of applications have been deemed eligible since the program began.

Biden said he would fix the problems plaguing the program “by securing passage” of a bill that would simplify the application and certification processes, including making all loans and repayment plans eligible, while also providing partial forgiveness after five years. The legislation has been introduced in both the House and Senate, but with only Democratic support.

Beyond strengthening the existing program, Biden said he would create yet another forgiveness plan for workers in schools, government and other nonprofit organizations. For each year of service, workers would be eligible to have $10,000 of their undergraduate or graduate debt erased for up to five years (for a total of $50,000).

Relief for defrauded students

A rule known as “borrower defense to repayment” allows students who were seriously misled by the schools they attended to seek relief on their federal student loans. After several notorious for-profit chains collapsed, including Corinthian Colleges and ITT Technical Institute, hundreds of thousands of people flooded the Education Department with claims.

Education Secretary Betsy DeVos has fought them at every turn and let many applications languish for years, until federal judges in multiple cases ordered her to speed things up. DeVos' department responded with mass denials of the claims, sending out more than 83,000 in the last year. However, a federal judge in California questioned those denials in a ruling last month, calling them “perfunctory” and “potentially unlawful.” The former students represented in the class-action case have asked the court to cancel DeVos' denials.

Eileen Connor, legal director of the Project on Predatory Student Lending, which is representing borrowers in the California case, said she hoped the Biden administration would revive the spirit of the borrower-defense program and grant relief to hundreds of thousands of students who were defrauded. A new education secretary has the authority to overturn past denials, Connor said, and create new standards for adjudicating the 80,000 applications that are still pending.

Biden pledged during his campaign to forgive the debt of borrowers who “were deceived by the worst for-profit college or career profiteers.” He also said he would reinstate more permissive rules for the program that were enacted during the Obama administration and eliminated by DeVos.

Private student loans

Both federal loans and private student loans can be discharged in bankruptcy, but they aren’t wiped away as easily as credit card and other consumer debt. Borrowers have to file a separate legal proceeding, and lawmakers have toughened the rules over the past several decades. In fact, Biden supported a 2005 law that made private student loans more difficult to discharge, but he has pledged to reverse that rule as president.

That may prove challenging because few Republicans have supported any changes to the bankruptcy laws. A House bill has one Republican co-sponsor, but the Senate’s version, led by Sen. Dick Durbin of Illinois, has only Democratic support.

Student loan servicing

The Education Department outsources the task of servicing its 42 million federal student loans, and government auditors and watchdogs have repeatedly criticized the contractors for doing a poor job. Building a better system is a bipartisan agency goal that stretches back to the Obama administration, but actually doing that is complicated.

DeVos' department repeatedly changed its plans and canceled bid solicitations, which has led it to the brink of a crisis: Most of the agency’s servicing contracts run out in December 2021 and cannot be extended.

The agency’s last-ditch effort to avert disaster was a new solicitation it posted last month seeking two contractors to run an interim system. But that time frame is extremely tight, and if this latest solicitation fails, it faces two bad choices: Pay its existing vendors significantly higher rates to keep working, or shift millions of borrowers to new servicers, a process that has been chaotic in the past.

“We’re at the point in the whole student-loan-servicing saga where the urgency is greater than it’s ever been,” said Clare McCann, the deputy director for federal higher education policy at New America, a left-leaning think thank. “This affects tens of million of borrowers, and it’s an issue that needs to be close to the top of the list.”