Biden wants to eliminate origination fees for student loans and make some forgiveness tax-free

By Jillian Berman

The proposals in the president's budget fit in with his administration's broader plans on student-debt relief

The White House is proposing tweaks to the student-loan program that could make the loans less costly for borrowers.

As part of the White House budget proposal released Monday, the Biden administration is asking Congress to eliminate origination fees on student loans and make permanent a COVID-era law that excludes some student-loan forgiveness from income for tax purposes. The proposals on student debt fit into the White House's broader efforts to find ways to reform the student-loan system after the Supreme Court struck down President Joe Biden's plan to cancel student debt for a wide swath of borrowers.

The budget proposals are far from established law. Instead, the document is a signal to Congress and the public of the president's priorities. Still, there may be appetite in Congress to take up some of the president's proposals, including the plan to ax student-loan origination fees. Bipartisan legislation that would do just that is currently working its way through Congress.

Federal loans for undergraduates carry a 1% origination fee. As a result of the fees, "students borrow a dollar but only get 99 cents for their educational expenses," Undersecretary of Education James Kvaal told reporters Monday.

Graduate students and parents using the government's PLUS program pay an even steeper origination fee of 4%. The average graduate student in a two-year program pays roughly $1,287 in fees if they're paying back the debt on a 10-year timeline, according to a 2023 analysis from the National Association of Student Financial Aid Administrators.

For the average undergraduate student in a four-year program, that cost could come to $231 over 10 years, NASFAA found.

The government earned about $6.5 billion from the fees over four years, according to NASFAA. But they're a vestige of the old federal student-loan system, in which the government guaranteed and subsidized lending done by financial institutions. Now, the government makes loans directly to students.

Justin Draeger, the chief executive of NASFAA, said the organization applauds the Biden administration's decision to include eliminating fees in its budget request.

"These fees act as a hidden tax on student loans and make the process of borrowing money for school even more difficult for students," he said.

Permanently getting rid of taxes on certain types of student-loan forgiveness

The president's budget is also proposing to make permanent a provision of a COVID-era law that exempts certain types of student-debt forgiveness from being counted as income for tax purposes.

For years, advocates and some lawmakers had worried that borrowers who received debt relief through income-driven repayment would face huge tax bills. Under these plans, borrowers can repay their debt as a percentage of income and have the remainder canceled after at least 20 years of payments.

As part of the American Rescue Plan Act passed in 2021, lawmakers said that forgiveness under IDR plans wouldn't be counted as income for federal tax purposes. The special tax treatment expires at the end of 2025. Now, the Biden administration is proposing to permanently exempt the debt forgiveness from taxation.

Already, debt cancellation through other programs, like Public Service Loan Forgiveness, is tax-free.

Changing the tax treatment of some types of debt relief permanently could face pushback from Republican lawmakers. Over the past few years, the number of borrowers receiving debt cancellation through income-driven repayment has expanded dramatically through efforts from the Biden administration. These initiatives have drawn the ire of congressional Republicans who say they're a giveaway to student-loan borrowers at the expense of taxpayers.

Officials made it easier for borrowers who had been paying for 20 years to actually get relief, but were stymied by technicalities. In addition, the Department of Education created a new version of income-driven repayment that allows people who borrowed $12,000 or less to have their debt canceled after 10 years of payments.

More money for key Department of Education office

Other aspects of the president's education budget are also likely to set up a fight with Congress. The Department of Education is asking for $625 million above what Congress enacted last year for the Office of Federal Student Aid. That office is responsible for sending federal student-aid dollars to students and colleges and for overseeing student-loan repayment.

In recent years, congressional Republicans have refused to increase funding for FSA over concerns the Biden administration would use it to implement broad-based student-loan forgiveness. Department of Education officials have blamed the lack of funding for the challenging return to student-loan repayment after the COVID-era pause and the glitchy rollout of the new Federal Financial Aid, or FAFSA, form.

In addition to proposals aimed at making student-loan repayment more manageable, the White House is also pitching ways to make college more affordable. The budget includes a request to increase the maximum Pell grant, the money the government provides to low-income students to attend college. In addition, the White House suggested making community college free, a proposal that Congress killed a few years ago.

-Jillian Berman

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03-11-24 1729ET

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