Tax Notes logo

Biden Says Tax-Free Student Debt Relief Plan Will Help Millions

Posted on Aug. 25, 2022

President Biden made his long-awaited announcement on federal student loan forgiveness, providing up to $20,000 in debt relief for Pell Grant recipients and up to $10,000 for millions of other borrowers.

Individuals who earn less than $125,000 per year and married couples with combined earnings of less than $250,000 will be eligible for the relief.

Under provisions stipulated in the American Rescue Plan Act of 2021, the debt cancellation will not be treated as taxable income at the federal level.

“Both of these targeted actions are for families that need it the most: working- and middle-class people hit especially hard during the pandemic,” Biden said in an August 24 White House announcement.

Biden said the plan will help an estimated 43 million people, including 20 million whose debts will be entirely erased. “All this means is people can finally start to crawl out of that mountain of debt,” he said. 

Republicans, and even some Democrats, oppose the plan.

Senate Minority Leader Mitch McConnell, R-Ky., called it “a slap in the face” to American families.

“The median American with student loans already has a significantly higher income than the median American overall. Experts who studied similar past proposals found that the overwhelming benefit of student loan socialism flows to higher-earning Americans,” McConnell said in a release.

Jason Furman of Harvard University blasted the measure, arguing that it will stoke inflation and raise taxes.

“Pouring roughly half [a] trillion dollars of gasoline on the inflationary fire that is already burning is reckless,” Furman, chair of the Council of Economic Advisers under President Obama, said in an August 24 tweet. “Most importantly, everyone else will pay for this either in the form of higher inflation or in higher taxes or lower benefits in the future.”

Lawrence Summers, a Treasury secretary under President Clinton, said taxpayer funds that will be used for student debt relief could have been invested in other initiatives.

“Scarce public resources should be put to their highest and best use, regardless of how they are derived. Debt relief rather than head start? Adequate funding of fundamental science? COVID care? Strengthening opportunities for non-college workers? I don’t get it,” Summers wrote on Twitter.

In a study released August 23, the Penn Wharton Budget Model estimated that canceling $10,000 in federal student loans for borrowers earning less than $125,000 per year would cost the government $330 billion over 10 years.

Penn Wharton also estimated that about 70 percent of the forgiven debt would go to households in the top 60 percent of income distribution.

The findings appear to negate one of the main talking points the Biden administration and Democrats made during their pitch for the recently signed reconciliation bill.

“It completely wipes out the deficit reduction in the Inflation Reduction Act [P.L. 117-169] . . . and it appears it will exceed that cost,” William McBride of the Tax Foundation told Tax Notes.

McBride said it’s unclear who will be tax exempt from the debt cancellation, referring to provisions in ARPA for student loans that expire in 2025 and pointing out that some states will still treat the debt forgiveness as taxable income.

Proponents of the plan argue it will help address ballooning student loan debt and tackle economic inequality.

“Targeted student debt cancellation of at least $10,000 will help millions of Americans better manage their budgets, build wealth, and reduce the racial wealth gap, immediately improving financial security and laying the foundation for faster upward economic mobility,” the Center for American Progress said in an August 23 statement.

Copy RID