Written by Today, we discuss three things to know about Biden’s student loan forgiveness plan. If you have been watching the news, you heard President Joe Biden has forgiven $10,000 ($20,000 for Pell Grant recipients) of student loan debt for people who make below $125,000 per year. We will discuss the financial and tax impact, as well as answer the concerns regarding: (1) is that fair, (2) is it legal, and (3) what is the impact on inflation?
All three of these are fantastic questions and we’ll discuss each of them in some way, shape or form without getting too political. President Joe Biden, made the campaign promises he was going to forgive some student loan debt.
Where it started?
He started by forgiving student loans from for-profit schools. The most recent being, ITT Technical Institute. Since the school no longer exists, it makes the degree essentially worthless. As a result, the federal government decided those students should not have to pay back their loans. Naturally, this brings the question of saving people from the consequences of their own decisions. It’s a reasonable question.
I’m generally on the side that the government, every single month is subsidizing a company, state, country or person. Knowing this is the case, I don’t get too worried about it because that’s what the government does. It takes money with taxes and then it gives it to someone else. In other words, we shouldn’t spend our time worrying about winter. Instead, we should focus on preparing for the winter.
Prepare for the storm
To no surprise, Florida winter is not your typical winter. But you know what is worth preparing for in Florida? Hurricanes! Hurricane season comes every year and it lasts about 6-months. Saying this out-loud, I do wonder why any of us would live in Florida, but I digress. Knowing we are going to see hurricanes for half the year, we spend our time figuring out how to build houses and infrastructure. Infrastructures that reduce flooding quickly and houses that don’t have roofs flying off.
We are usually able to withstand anything below a category two storm because of the investments we’ve made in our infrastructure. I say that to say some President Biden made a campaign promise to reduce student loan debt, the best thing we can do is assume he is going to keep his promise. We make a plan for if the debt is cancelled and if the debt is no cancelled.
But is it fair?
I’m often reminded of the parable of the owner and the vineyard. There was this landowner who had a vineyard and he was paying people to work in his vineyard. If he hired you at 9:00 AM, he said he’d pay you a day’s wage. When he met people at noon, he offered to pay them a day’s wage too. Even the people he met an hour before closing, he offered to pay them a fair wage.
In the end, he paid from the last to the first. The people who worked for a half-day and for an hour were paid a day’s wage. Seeing this, the people who worked the entire day expected to be paid more than a day’s wage. However, the owner paid them the agreed upon day’s wage. Upset by this, the worker’s complained they worked all day, carried most of the load, and deserved more. The owner reminded them they were paid what they agreed upon and he has the ability to pay others what he wanted. It was his money and if he wanted to be generous, he could.
Student debt forgiveness is different
While the student loan forgiveness isn’t a 100% match with the story, many are concerned about the fact they paid their student loans off without help. As a result, there is no benefit for them. Instead, it discourages them and has them feeling like a fool for paying off their student loans. Some took out loans or used assets they could have allocated to something else if they knew.
Now, where the parable is aligned is the fact that we entered into an agreed upon contract. The agreement was that each of us had to pay back our loans. It was our job to graduate with a degree and find employment that paid us enough to pay back our loans. There has been different legislation to eliminate student loan debt for those who work in the non-profit and public sectors. They only needed to make the agreed upon income-based payment for 10 years. After that, their remaining balance was forgiven. It’s probably safe to say, this isn’t the last time the government will tinker with student loan debt.
What about inflation?
For those who are concerned from an inflationary perspective, I would say that is a very reasonable and noticeable concern. The government says, were going to offset the additional spending by reinstating student loan payments on December 31st, 2022. Which means they will start again on January 1st, 2023. However, even if that is the case, what about the money in the economy in the meantime? It is fair to say when people have less debt, they have more money. And when people have more money, they usually spend more. Which is not what you want to see happen when battling inflation.
Impact on taxes
From a tax perspective, most debt forgiveness is considered income by the IRS. In their mind, you were given $10,000 to pay off your debt. The goods news is they passed The COVID-19 relief package in 2021, which makes all student loan forgiveness tax-free until 2025. Now, this is only true for the federal government. Which means some of your states may still tax your debt forgiveness as income. You are going to have to check to see how your individual state see it.
Final thoughts
There are some things that should surprise us, but this shouldn’t be one of them. Is it fair to those who paid off their student loan debt on their own? Probably not, but that doesn’t mean something is inherently a bad idea. There are billions of dollars given each year for a variety of reasons. The government gets to decide what it does with the money. We get to decide who is elected. Therefore, control what you can control, and let everything else go.
References:
- Image from: Freepik.com
- The Washington Post: U.S. cancels $3.9 billion in loan debt of ITT Tech students
- CNBC: Here’s what President Biden’s student loan forgiveness means for your taxes