Senators Chuck Schumer (D-NY) and Elizabeth Warren (D-MA) want President Joe Biden to provide student loans of $ 50,000 per borrower. They claim that he can do this unilaterally by order of the executive.
President Biden has promised to cancel $ 10,000 in student loan debt per borrower, but wants Congress to pass laws to enforce them. President Biden’s proposed $ 1.9 trillion COVID-19 relief plan does not include student loan forgiveness.
Student loan legislation is unlikely to go into effect before the end of summer, as federal student loan payments are suspended until September 30, 2021.
Can the President cancel all federal student loans?
The president Not have the legal authority to make student loans themselves. Only Congress has the power of the purse. Executive measures can only be used if specifically approved by Congress.
The executive cannot spend money that has not been used by Congress under 31 USC 1301 and Article I, Section 7, Clause 7 of the US Constitution.
Claims that the President has authority to provide student loans are based on a misinterpretation of the Higher Education Act of 1965 in 20 USC 1082 (a) (6). This section of the Higher Education Act of 1965 gives the U.S. Secretary of Education the power to:
“… to change, compromise, revoke or release rights, titles, claims, liens or claims, however acquired, including any equity or a right of redemption. “
But this quote is taken out of context. The preamble to this section of the Higher Education Act of 1965 limits that power to acting under the Act:
“In performing and in relation to the functions, powers and duties assigned to him by this Part, the Secretary may …”
In other words, when Congress approves a loan-making program, such as a loan program. For example, public service loans, teacher loans, or full and permanent disability dismissal, the U.S. Secretary of Education have the authority to grant student loans that have been approved under the terms of these loan allocation programs.
The president has no power to cancel student loan debt without the approval of a particular loan program by Congress. As the US Supreme Court ruled in Whitman v American Trucking Assns., Inc. (531 USC 457, 2001), “Congress does not hide elephants in mouse holes.”
In addition, the language “this part” refers to Title IV Part B of the Higher Education Act of 1965, which applies only to loans granted under the Federal Family Education Loan (FFEL) program.
There is similar language in Part E at 20 USC 1087hh for the Federal Perkins Loan program. There is no similar language for Part D for the William D. Ford direct loan program.
The “Parallel Terms Clause” in the Higher Education Act of 1965 at 20 USC 1087e (a) (1) (also 20 USC 1087a (b) (2)) requires that direct loan program loans must have the same terms as FFEL program loans. However, this does not apply to the waiver authority as the waiver authority is not part of the terms of the loans.
Other legal obstacles
Additionally, the regulations in 31 CFR 902.2 specify the four situations in which a debt can be compromised.
Even if the president could use an executive order to waive student loan debt, which he cannot, those rules will prevent the president from canceling the student loan debt of borrowers who are able to repay their student loans within a reasonable time.
Federal authorities are also required to comply with the provisions of 31 CFR 901.1 (a) bis “Aggressively collect all debts.”
What about the payment break and the interest waiver?
Did President Trump fail to use this waiver power to implement the payment hiatus and interest waiver, setting a precedent that could be used to grant federal student loans?
Actually, he didn’t. The Executive Memorandum of August 8, 2020 referred to:
“… reasonable exemptions and changes to the requirements and conditions for the postponement of economic difficulties as set out in Section 455 (f) (2) (D) of the Higher Education Act of 1965, as amended, 20 USC 1087e (f) (2 ) (D) and to grant the borrowers the necessary deferral to continue the temporary suspension of payments and waiver of all interest on student loans from the Department of Education through December 31, 2020. “
The Executive Memorandum did not specify which waivers and amendments should be used to implement the payment break and the interest waiver.
Defining the shift in economic hardship at 20 USC 1085 (o) (1) (B) enables the U.S. Secretary of Education to define new eligibility criteria. However, this is not necessarily sufficient as the US Secretary of Education is required to do so under 20 USC 1085 (o) (2) “Consider the borrower’s income and debt ratio as major drivers” when defining new admission criteria.
The regulations in 34 CFR 685.205 (b) (8) provide a better solution because the regulations allow the U.S. Secretary of Education to “A national military mobilization or some other local or national emergency.” However, neither forbearance nor economic hardship allow an interest waiver.
In order to waive interest after the CARES Act’s payment pause has expired, the US Secretary of Education must rely on the waiver provided for in the HEROES Act of 2003 [20 USC 1098bb]. This exemption allows the U.S. Secretary of Education to waive or change any provision of Title IV of the Higher Education Act of 1965 in connection with a war or other military operation or national emergency “How it may be necessary to ensure that data subjects are not placed in a worse financial position due to their status as data subjects in relation to this financial assistance.”
The exemption authority provided for in the HEROES Act of 2003 is sufficient to implement the payment break and the interest waiver, but not to issue student loans.
Student loan issuance goes beyond what is required to ensure that borrowers are in the same financial position after the national emergency as they were before the national emergency.
In addition, the Executive Memorandum stated that “this memorandum must be implemented in accordance with applicable law and subject to the availability of funds.” Congress has not allocated any funds for the extensive granting of student loans.
Can the President waive tax on student loans?
Publisher’s Note: On March 11, 2021, President Biden signed the American Recovery Act. This law made the granting of loans for all loan types and programs tax-free at the federal level until December 31, 2025. This includes both federal and personal loans.
The IRS regards the repayment of debts as taxable income for the borrower. This is required under the Internal Revenue Code of 1986 at 26 USC 61 (a) (11). It’s like someone gave the borrower money to pay off the debt. Borrowers are given an IRS Form 1099-C when their debts are canceled.
Certain types of student loan issuance and relief are excluded from income due to specific laws passed by Congress.
However, other types of student loan issuance are taxable. For example, the cancellation of the remaining debt after 20 or 25 years in an IDR (Income-Driven Repayment) plan is taxable under applicable law.
However, the IRS may waive the tax liability of insolvent borrowers if the total debt exceeds total assets [26 USC 108(a)(1)(B) and (d)(3)]. The bankruptcy exclusion from income is limited to the amount of the bankruptcy [26 USC 108(a)(3)]. Borrowers who have been on an income-related repayment plan for two or more decades are likely to be insolvent, but there is no guarantee that the debt will be canceled. Still, the IRS used similar arguments to make the borrower’s defense against repayment tax-free.
If large student loan issuance is restricted to borrowers in economic distress, the president could ask the IRS to forgive the taxes on the lending, arguing that the borrowers are likely to be insolvent.
Otherwise, student loan issuance is taxable unless Congress passes specific law allowing income exclusion for loan issuance.
Does Student Loan Granting Qualify as Disaster Relief?
Qualified disaster relief payments are excluded from income under 26 USC 139. COVID-19 is considered a national disaster under the Robert T. Stafford Disaster Relief and Emergency Assistance Act.
However, there are only two types of Qualified Disaster Relief Payments that can apply when viewed from the side:
However, student loans are not a cost created by the COVID-19 pandemic, and student loan issuance has nothing to do with the pandemic.