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Democratic senators say a provision in the $1.9 trillion stimulus package signed by President Joe Biden last week paves the way for him to cancel student debt for a broad swath of borrowers.
As part of the law, borrowers who have any student debt cancelled through the end of 2025 won’t face a tax bill over the discharged debt. Previously, cancelled student loan debt (with a few exceptions, including debt discharged through Public Service Loan Forgiveness) was typically considered income for tax purposes.
That tax treatment has been one of the major arguments critics have leveled against proposals urging Biden to cancel student debt. Senator Chuck Schumer, the majority leader, told reporters Monday that with the provision now law, that argument “vanishes.”
“I’m thrilled the provision is in the historic [American Rescue Plan],” Schumer said. “We have more to do, the Biden administration can, and should go further and cancel $50,000.”
Latest in debate over student debt cancellation
Since September Schumer and Senator Elizabeth Warren, a Massachusetts Democrat, have been urging Biden to cancel up to $50,000 in student debt per borrower. Biden has previously appeared hesitant to take up the Senators’ proposal. Changing the tax treatment of student debt cancellation, a proposal that was introduced by Warren and Senator Bob Menendez, a New Jersey Democrat, is the latest development in the debate that’s been raging over the idea.
The notion of student debt cancellation has been around for years, but gained new urgency after Biden was elected in November. Amid the coronavirus-induced downturn, student debt cancellation is a particularly attractive form of relief for progressives and some mainstream Democrats because Biden and the executive branch can arguably do it themselves.
Even among those who support debt cancellation there is debate about whether it should be done by executive action or through Congress. In addition, there’s a range of opinions among supporters about how much debt per borrower should be cancelled and whether there should be a cap on the income of borrowers receiving the relief.
Though Biden has at times called for Congress to take the lead on any cancellation and has said he supports cancelling $10,000 in debt — instead of the Senators’ proposed $50,000 or some activists’ proposal to cancel it all — the president has reportedly directed the Department of Justice to review his legal authority to cancel student loans.
“If they can do $10,000, they can do $50,000,” Schumer said. “If it’s OK legally to do a small amount it’s OK legally to do a larger amount.”
‘The President can do this’
As for why the President should use his authority to cancel student debt, instead of the lawmakers using their power to try to do it, all three Senators said the executive route would be faster and easier. “We have not seen our Republican colleagues jump at this opportunity,” Schumer said. “That’s the quickest, easiest and best way to do it,” Schumer said of Biden cancelling the debt. “If he doesn’t do it we’ll pursue other options.”
Warren noted that she had introduced legislation to cancel up to $50,000 in student debt already. “To me thats just not a reason to hold off,” she said. “The President can do this and I very much hope that he will soon.”
In addition to touting the elimination of taxes on cancelled debt, Schumer, Warren and Menendez pushed back at other arguments against broad-based student loan discharge.
Asked to speak to the fairness of the proposal — many have said that it would be unfair to provide cancellation to today’s borrowers when others may have already paid off their student loans or saved aggressively for college — Schumer responded that that argument “could be used against any form of progress.”
“This is real progress, even though it won’t help rectify some of the injustices of the past, it does rectify injustices of the present and future,” he said.
Warren pointed to the benefits student debt cancellation would provide to borrowers who started college, but didn’t finish their degree, a demographic that struggles disproportionately with their student loans.
“A college diploma, which was surely the intent of most people when they took on student loan debt, has not always paid off for everyone equally,” she said. “There are as many reasons as there are people who tried and couldn’t quite make it and now find themselves earning at the level of a high school graduate, but trying to manage college-level debt.”
Even if broad-based student debt cancellation doesn’t come to fruition, eliminating taxes on discharged debt temporarily could have benefits for borrowers. The Senators estimated that for a borrower earning $50,000 a year, the provision would save them $2,200 for every $10,000 in cancelled debt.
Any borrowers who have their loans discharged through income-driven repayment during this period wouldn’t have to pay taxes on the debt. Income-driven repayment allows federal student loan borrowers to repay their loans as a percentage of their income and have the remaining debt cancelled after at least 20 years of payments.
The provision that became law last week also covers private student loans, which means any debt commercial lenders cancel in the next five years also wouldn’t be taxable.
