By Maylene Rodriguez Scott, 2019 Dallas Martin Endowment Policy Intern
Sen. Elizabeth Warren (D-MA) and House Majority Whip James Clyburn (D-SC) recently introduced the Student Loan Debt Relief Act, the first bill introduced that would cancel student loan debt—a key plank of Warren’s presidential campaign platform. This bill would enact a wide-reaching, one-time cancellation of student loan debt, provide loan refinancing options, and restore the ability to cancel student debt under bankruptcy. So far, the bill has amassed eight Democratic co-sponsors in the House.
Under this bill, qualified borrowers would receive a one-time cancellation of up to $50,000 of student debt. Borrowers with an adjusted gross household income of $100,000 or less would receive the maximum $50,000 loan forgiveness. Individual borrowers who have an adjusted gross income of $250,000 or less are eligible to receive partial cancellation, with the cancellation amount decreasing by $1 for every $3 in income above the $100,000 threshold. The eligible household income threshold doubles for borrowers who file joint tax returns, however the total cancellation of an individual student debt may not exceed the $50,000 cap.
The cancelled debt would be excluded from taxable income. For loans that were in default prior to being fully cancelled, the Department of Education (ED) will ask consumer reporting agencies to remove the default from the borrower’s credit history.
Following enactment and during the year in which the debt cancellations occur, ED will automatically place every borrower in administrative forbearance unless the borrower chooses to opt-out. Interest will not accrue for borrowers during this administrative forbearance and ED may not pursue defaulted borrowers through debt collections during this time.
Borrowers with Federal Family Education Loans (FFEL), Federal Direct Student Loans, Parent and Grad PLUS Loans, and Federal Perkins Loans are eligible for cancellation. If a borrower has multiple types of student loans, ED will first cancel the loan with the highest interest rate. If a borrower has two loans with the same interest rate, ED will first cancel the loan with the highest balance.
The bill stipulates that the Treasury Department and Internal Revenue Service (IRS) would share tax return information with ED to verify which borrowers are eligible for student loan cancellation and automatically cancel eligible debt without action from the borrower. The tax information shared between the IRS and ED would be limited to borrower identification and necessary income information.
Loan Refinancing and Notification
After the debt cancellation, ED would refinance the remaining federal student loans with an interest rate equal to the interest rates offered to new borrowers during the 2016-17 school year, similar to the Bank on Students Emergency Loan Refinancing Act. A program to automatically refinance borrowers’ loans would be developed by ED, the Department of Treasury, and the Consumer Financial Protection Bureau. Private student loan borrowers would have the option to refinance their loans into Direct loans, and have them considered for cancellation and refinanced interest rates.
Report on Progress of Implementation & Notification to Borrowers
Within three months after the date of enactment, ED would be required to notify all eligible borrowers of (1) the automatic upcoming loan cancellation, (2) the automatic refinancing of their loans, (3) the ability to refinance private loans into Direct loans. Banks and financial institutions would be required to include the opportunity to refinance private loans in their disclosure forms to borrowers.
This bill comes at a time when numerous presidential candidates have announced their proposals to address student debt and college affordability. To read more about the candidates’ stances on higher education, check out our 2020 Presidential Candidate Tracker.
Publication Date: 8/5/2019
Terri L | 8/6/2019 11:33:45 AM
I applaud Senator Warren for her continued leadership on this important issue. The details of the bill will determine if it is actually workable. I would like to see debt relief focused on students who are in the most danger of default, especially the vast majority who have relatively low balances and did not complete a degree. I imagine that forgiving loans for these students might enable them to return and complete. I am also strongly in favor of the bankruptcy provision.
Miranda R | 8/5/2019 2:22:00 PM
I wouldn't be so angry about this if I didn't know such a large subset of students use the loan money for things not related to school - like paying for Christmas and spring break vacation and brand new cars. These are often the students that have defaulted on their student loans as well. I have a really hard time feeling bad for folks when so many misuse it. My tax money shouldn't be going to pay for the irresponsible decisions of others. Candidates should be focusing on how to regulate the money they are giving students. Using a system like FSA cards to ensure funds are being spent appropriately by the borrower would be a great first step.
Heather B | 8/5/2019 10:0:15 AM
Is borrower defined as someone who has separated from an institution, or does this proposal include current students? I'm thinking current students could rush to borrow the max prior to enactment since that amount will be canceled anyway? Just in the weeds as always...
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