The Biden administration recently announced a $ 5.8 billion loan waiver for 323,000 disabled borrowers. This forgiveness is automatic without the borrower having to apply for forgiveness.
The automatic student loan issuance certainly sounds like good deal to those who receive the notice. But is it legal for the government to cancel or pay off a debt without first receiving a request from borrowers or any paperwork? And, the automatic student loan disbursement could result in an unexpected tax bill for outgoing borrowers.
We answer these two key questions below. We’ll also discuss how recent regulatory changes could lead to more automatic cancellation of student loans in the future.
Recent Student Loan Granting Actions
Since January 2021, President Biden and US Secretary of Education Miguel Cardona have taken several steps to provide targeted financial relief to federal student loan borrowers.
The Biden administration has waived more than $ 8.7 billion in federal student loans to more than 455,000 borrowers and granted millions of other interest waivers.
Which of these government award programs were automatic?
Several of these programs provided automatic student loan forgiveness. This includes the:
- Dismissals due to disability: They took place automatically by comparing data with the Social Security Administration (SSA). There are certain social security disability statuses that meet the criteria for a TPD dismissal. The US Department of Education had previously introduced automatic layoffs for disabled veterans through a data comparison with the Veterans Administration (VA).
- Interest exemption for current and former active service members: This is done automatically by comparing data with the US Department of Defense (DOD).
- Payment pause and interest waiver: This is automatic and made available to borrowers with federal student loans from the US Department of Education. The payment break indirectly ensures that student loans are granted. The paused payments will count towards the requirement of 120 payments for public service lending. They also count towards the 240 or 300 payment requirements for forgiveness after 20 or 25 years in an income-oriented repayment plan (IDR).
The U.S. Department of Education also announced the formation of a negotiated rulemaking committee to review regulatory changes related to targeted discharge and dispensation agencies. The committee meetings will take place in October, November and December 2021.
Do universities automatically grant student loans?
Yes, several colleges have used Higher Education Emergency Relief Fund (HEERF) funds to release unpaid funds. These include several Historically Black Colleges and Universities (HBCU), such as:
- State University of Delaware
- Fayetteville State University
- Fort Valley State University
- Philander Smith College
- Shaw University
- Wilberforce University.
Other colleges that provide financial relief for their graduating classes include:
- Compton Community College
- Georgia Southwestern University
- Lansing Community College
- Quinsigamond Community College
- Trinity Washington University.
These efforts were in part through Robert Smith’s provision of $ 34 million in student loans for the 2019 class at Morehouse College, and subsequent donations to multiple colleges from Mackenzie Scott (spouse of Amazon founder Jeff Bezos) and Reed Hastings (CEO of Netflix ).
Is Automatic Student Loan Allocation Legal?
A full loan must be approved by law in Congress. It cannot be implemented through executive measures. However, the student loan waiver measures taken so far by the Biden administration have been implemented under specific loan waiver programs previously approved by Congress. These programs include:
The main question is whether the Biden administration can implement the credit waiver automaticallywithout the need for eligible borrowers to apply for waiver.
The short answer is yes. The U.S. Department of Education has the legal right to automatically pay certain federal student loan debt without the borrower having to submit an application. And in some cases it is even required by law to do so.
Old legal language for paying student loans
The legal language for a TPD discharge at 20 USC 1087 (a) (1) specifies the circumstances under which the Secretary of Education “target”Replacing a borrower’s student loan. The use of the word “shall” as opposed to the word “may” means that the Department of Education has no discretion in determining whether to pay an eligible borrower’s debt.
In other cases, the legal language is somewhat ambiguous. For example, the legal wording in USC 2087 (a) (2) provides for federal student loan relief for a disabled military member “who offers documentation this determination to the Minister of Education. “
The US Department of Education originally interpreted “whoever provides documents” to mean that disabled veterans must apply for a discharge from their student loans. After the US Department of Education began a data match with the US Department of Defense (DOD), a bizarre bureaucratic process ensued:
- The US Department of Education, knowing that the borrower was eligible for a disability pension, had to send the VA documents to the borrower.
- The borrower would then have to send it back to the U.S. Department of Education to apply for discharge.
Some borrowers, such as quadriplegics and disabled borrowers in a coma, are unable to do this. The procedure for designating a representative of the borrower to act on behalf of the borrower also requires an application signed by the borrower. This in turn creates a bureaucratic barrier.
New rule that enables student loan disbursements to be made automatically
The U.S. Department of Education recently launched a Regulation change to enable automatic dismissal by means of a data comparison without the borrower having to submit an application.
Due to the master calendar regulations, the new regulations would normally have come into force on July 1, 2022. But the US Secretary of Education has the authority to implement the regulatory changes early on and has decided to do so. They are therefore valid from September 30th, 2021.
The Potential Tax Impact of Automatically Canceled Student Debt
The regulations on residual debt relief after 20 or 25 years in an IDR plan already provide for automatic residual debt relief. And the IRS regards debt relief as the income equivalent for the borrower.
This can lead to a significant tax burden. However, with the Tax Cuts and Jobs Act of 2017 (PL 115-97), the deductions in the event of death and disability were extended until December 31.
Most other types of student loan waivers have already been excluded from income on federal tax returns. Still, the American Rescue Plan Act of 2021 provided blanket exclusion for all layoffs and student loan awards through the end of 2025.
This leaves state taxation a potential problem in only a handful of states. The US Department of Education has decided to introduce an opt-out for student loan issuance to address this potential problem. Borrowers are informed that their loans will be automatically repaid unless they exercise their right to revoke the waiver.
Implications for the future
The US Department of Education can now attempt to automatically implement student loan waiver if possible. The US Department of Education may also be able to automatically impose death sentences. This could be achieved by comparing the data with the SSA’s Death Master File (DMF).
Other types of future loan waivers, such as President Biden’s proposed broad $ 10,000 loan waiver, can also be automatically implemented. This may require that the loan waiver be targeted in a manner that allows for automatic enforcement. For example, automatic student loan issuance could be restricted to federal loans held by the Department of Education.
Finally, the US Department of Education could also try to streamline and simplify the issuing and disbursement of student loans under existing programs through additional regulatory changes. A prominent example that comes to mind would be the abolition of three-year post-discharge surveillance for dismissals due to disability.