October 03, 2022

President Biden’s student loan forgiveness plan wipes away $10,000 or $20,000 per student, depending on the type of loan, for people making $125,000 or less ($250,000 or less for married couples). It’s estimated to cost at least $400 billion but will almost surely cost more than anticipated.

And yet, that’s only a small part of the overall change President Biden has in mind. There are some real dark sides of his loan forgiveness plan.

One is limiting future annual payments on student debt to 5% of discretionary income, but only after the borrower’s income is more than roughly $30,000 a year. Most student loan plans cap monthly payments to 10-15% of discretionary income, so the 5% cap proposed by President Biden is significant.

On top of that, this new plan would negate student loan payments entirely for those making less than roughly $30,500 a year. So, a loan-paying college graduate with income of $70,000 would pay roughly $1,975 a year, or just 5% of the $39,500 above the “no pay” threshold.

A second dark aspect of this plan is a 10-year maximum window for loan repayment. Under this proposal, the remaining debt would be completely forgiven if the borrower made payments for 10 years, regardless of how much is owed. That would replace the current 20-year payment requirement for such forgiveness.

Whip cream on top of this sundae is there would be no federal income tax due on the dollar amount of the forgiven loans.

Most students would go along with these ideas. Given they would pay 5% of disposable income for 10 years, they might not care how much a college charges for an education.

It may spark an arms race among schools to provide the best amenities for choosy students with no cost constraints. It could also induce students to live the high life with loaned money. Schools may be incentivized to enroll as many students as possible, regardless of educational acumen, charging whatever they want.

And it won’t matter because huge federal government checks will foot the bills.

Maybe someone in Congress will recognize this and step in? Perhaps. It seems attorneys may first, challenging the legality of such huge spending via executive order.