As a student loan borrower, I’m excited about the possibility of some form of student loan forgiveness happening in 2021. Democratic leaders like Elizabeth Warren and Bernie Sanders appear eager to cancel federal student debt. In Joe Biden, they have a powerful ally in the White House who may be willing to deliver some debt cancellation.
Some media reports claim that the President has the legal right to cancel student debt through an executive order. Others claim Congressional approval is the only way for it to happen.
As an attorney, I’m not convinced there is a clear answer.
This confusion makes student loan planning and strategy difficult. The possibility of federal forgiveness or debt cancellation is the student loan question I am most frequently asked by my friends and family. In this article, I’ll share my understanding of the current legal and political hurdles. I’ll also explain how it should impact student loan repayment strategy.
Does the President have the authority to forgive student loans through an executive order?
Executive orders from the President can make a huge difference for student loan borrowers.
Barack Obama created the Revised Pay As You Earn (REPAYE) plan through an executive order. Donald Trump used an executive order to freeze federal student loan payments and interest during the Covid-19 pandemic.
According to Warren and others, the Presidential can also cancel or forgive student debt. However, others claim that the President does not have this authority.
In my investigation into this issue, I reviewed a comprehensive legal analysis from a team of Harvard lawyers. They concluded that Congress has already given the President authority to cancel student debt.
The analysis from the Harvard team is compelling, but there are a couple of problems.
- The attorneys investigating the issue were members of the Harvard Project on Predatory Lending. This particular team has done an excellent job advocating for student loan borrowers in court. However, this history of borrower advocacy also means that they may not be best suited for an objective analysis of the current legal and regulatory framework.
- The Harvard team couldn’t identify an explicit right for the President to cancel debt via executive order. Instead, their statutory analysis found that debt forgiveness is permissible based upon a collection of existing laws.
I tend to agree with those who think the President has the power to forgive student debt via executive order. However, I can’t say for certain how federal judges might rule on the case. There are strong arguments on both sides of the issue.
The only certain thing is this: if the President attempts to cancel large amounts of federal student loans, the issue will definitely end up in court.
Joe Biden and the Politics of Student Loan Forgiveness in 2021
Biden is unlikely to try to cancel student debt through an executive order. (Update 12/26/20: Biden himself confirms that he is unlikely to forgive student debt via executive order.)
The potential litigation would cause chaos for student loan borrowers and servicers. Imagine a scenario where Biden signs an executive order forgiving $10,000 worth of student debt. Borrowers start celebrating, and the loan servicers reduce or eliminate balances. Unfortunately, there is a lawsuit alleging that Biden doesn’t have the authority to forgive the debt. The case could take over a year to resolve, and in that time, borrowers are confused about how much they owe and what they should do about their loans. Many Americans are unhappy.
Alternatively, Biden could sign bipartisan legislation passed by Congress. As part of a Covid-19 relief package, Congress could choose to include that same $10,000 in student loan forgiveness.
As someone with the goal of being a unifier, getting forgiveness legislation through Congress is the better option for Biden.
What are the chances that some debt gets forgiven?
At this point, it should be clear that nothing is set in stone.
There are two proposals currently being discussed.
Cancel $50,000 worth of student loans – This option has been advocated most notably by Elizabeth Warren and Chuck Schumer. They both believe that the President can cancel the debt with an executive order. Biden canceling $50,000 worth of debt is unlikely due to the political and legal hurdles previously discussed.
Forgive $10,000 in a Covid-19 relief package – This forgiveness option has already passed in the House of Representatives. The Senate is a big obstacle. Republicans appear to be uniformly opposed to student loan forgiveness as a means of economic stimulus. This loan forgiveness is more likely than the $50,000 debt cancellation, but still a somewhat long shot.
(Update 1/6/21: Democratic wins in the Georgia runoff elections will give Democrats control of the Senate. It helps the chances of the $10,000 loan forgiveness happening, but getting through Congress will still be a huge challenge.)
In short, student debt forgiveness or cancellation in 2021 is unlikely. However, unlikely events happen all the time. Borrowers should expect that it probably won’t happen but account for the possibility that it might.
How do borrowers plan around debt cancellation uncertainty?
Right now, it is actually pretty easy to deal with this variable.
Borrowers can plan for the possibility of student loan forgiveness in 2021 AND protect themselves if it doesn’t happen.
Federal student loan interest rates are 0%, and borrowers are not required to make payments. The student loan interest and payment freeze is likely to continue well into 2021.
Borrowers should use this time to build up an emergency fund and save money for future student loan payments. If the debt gets forgiven, those funds can be used for any other purpose. If the debt isn’t forgiven, borrowers have a stash of cash to pay down their balance. Those that made payments during the interest and payment freeze should request a refund.
Finally, even though refinance rates are near historic low levels, borrowers should resist the temptation to refinance their federal loans. A federal refinance would be a mistake because it converts the debt into private loans. Borrowers with private loans can proceed with refinancing because the forgiveness proposals would not impact private debt.