Bernie Sanders’ vs. Elizabeth Warren’s Debt Forgiveness Plans

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If there’s one thing most of the 2020 Democratic presidential candidates seem to agree on, it’s that it’s time to make college tuition more affordable for Americans.

For some, that means tuition-free community college, expanding Pell grants for students who come from a lower-income background, or even making tuition completely free for undergraduates attending public colleges and universities.

But what seems to be getting more attention right now than the candidates’ proposals for assisting students in the future, are their ideas for tackling the nation’s current growing student debt crisis—and helping the 43 million borrowers who already owe more than $1.6 trillion in student loans.

Two of the more high-profile plans to come out of the 2020 campaign so far are from Senator Bernie Sanders and Senator Elizabeth Warren. That’s partly because the candidates are two of the most well-known names in the pack of Democratic hopefuls, but they’ve also provided more details than many of the other plans put forth. And both plans include some level of forgiveness for borrowers who are looking for debt relief.

But the amount of forgiveness that’s being offered, as well as other aspects of the two candidates’ proposals, are very different. Here are some of the points on which they part ways.

Who Gets Forgiveness?

Sanders’ student loan forgiveness proposal is clear: Under his plan, all $1.6 trillion in student loan debt would be cancelled—no matter what the borrower’s background or income level might be.

Under Warren’s student loan forgiveness plan, debt cancellation would come in tiers based on income. Borrowers who earn $100,000 or less annually would be eligible for the maximum benefit of $50,000.

Those who fall between $100,000 and $250,000 per year would receive a benefit that gradually phases down (the more you earn the less debt will be cancelled). And borrowers who earn more than $250,000 annually would not be eligible at all for forgiveness under the plan.

The Feedback So Far

Fans of Sanders’ plan say everyone is equally deserving of a break when it comes to student debt. And, on a practical level, they say, it would be a struggle to evaluate each borrower’s bona fides when deciding their eligibility for Warren’s income-based forgiveness.

Critics of Sanders’ plan, on the other hand, say eliminating all student debt may seem like the right thing to do, but in reality its biggest benefits will go to wealthy families.

The thinking is that those from wealthy families are more likely to access higher education and be high-income graduates like doctors and lawyers, who sometimes carry large amounts of student debt but also end up in careers with higher salaries.

Warren’s plan has received some similar questions about who would benefit most, but she says her plan is about “targeted cancellation for the families that need it most,” and would help close the racial wealth gap.

She points to a Brandeis University analysis that found her proposal would provide at least some debt cancellation for 95% of Americans with student loan debt, and complete student debt cancellation for more than 75%. The Brandeis report also states the policy would have a “moderately positive effect” on the racial wealth gap, and also could have a cascading effect that would provide an overall boost to the economy.

Critics of both plans have questioned how fair debt forgiveness is for the people who already have paid their loans, or for those who made choices about where to go to school—or even whether they should go to school at all—based on their ability to pay.

Who Will Pay for These Programs?

Sanders wants to pay for his student loan forgiveness plan with a tax on stock market trades, which his campaign says would generate approximately $2.2 trillion over 10 years.

His proposal includes hitting financial institutions with a 0.5% tax on all stock transactions, a .01% tax on bond trades, and a 0.005% tax on derivative transactions.

Warren is proposing a wealth tax: Families would pay two cents on every dollar of net worth above a $50 million threshold, and three cents on every dollar above $1 billion. This “Ultra-Millionaire Tax,” as she calls it, is projected to bring in $2.75 trillion over a 10-year period.

The Feedback So Far

The tax associated with Warren’s student loan forgiveness plan would affect only the extremely wealthy, while Sanders’ “tax on Wall Street” could end up touching anyone who invests money. And that part of Sanders’ plan is getting some pushback.

The idea of a financial transaction tax has been rejected in the past by those in government and business who say it could curb investing and suppress growth. In a recent online commentary discussing the effects of this type of financial transaction tax, Kenneth E. Bent Jr., CEO of the Securities Industry and Financial Markets Association, writes that history has proven “such a tax never raises anywhere close to the revenue promised, while wreaking havoc for investors and markets.”

Speaking of Taxes, Will the Canceled Debt Be Taxed?

Canceled debt would not be taxed as income under either Sanders’ or Warren’s plan.

Sanders states clearly in his College for All Act that the amount forgiven will not be counted as gross income to be taxed by the IRS.

Warren also says forgiveness won’t be taxed—and she has a little history to back that up. This is an issue the senator has tackled before, during her fight to get loan forgiveness for tens of thousands of students found to have been defrauded by Corinthian Colleges, a failed for-profit college chain.

Once that mission was accomplished, Warren worked in 2015 to keep those students from having to pay taxes on their forgiveness loans. And she succeeded.

Currently, federal student loan balances forgiven through programs with an employment requirement—such as the Public Service Loan Forgiveness (PSLF) and the Teacher Loan Forgiveness Program—are generally exempt from being taxed by the IRS.

Under some other federal repayment programs, your remaining balance may be eligible to be forgiven after 20 or 25 years, but what’s left on your loans—the amount that’s forgiven—may be considered taxable income. (We know it’s probably pretty obvious here, but always consult with a tax professional if you have questions about anything tax-related.)

The feedback so far:

There have been efforts in the past to change the way forgiveness is taxed, including the Stop Taxing Death and Disability Act in 2017; the Relief for Underwater Student Borrowers Act, introduced in 2016, and the Student Loan Tax Debt Relief Act in 2015. None has passed so far.

Which Loan Types Would Qualify for Forgiveness?

Under both candidates’ proposals, federal and private student loans would be eligible for forgiveness. No loans have been exempted at this time, including loans to parents. But there would be a difference in how federal and private loans are handled.

Under Sanders’ proposal, which he introduced in the Senate in June as the College for All Act of 2019, the secretary of education would have 180 days to forgive outstanding balances as of the day the bill is signed into law.

The legislation also gives the secretary of education temporary authority to purchase private student loans that are held by banks or other private lenders and then forgive the loan. (The purchase would include unpaid principal, accrued unpaid interest, and any late charges owed to a private lender.)

The borrower would then be issued a Federal Direct Forgiveness Loan equal to the amount paid to the private lender, and that loan would immediately be cancelled.

Warren’s plan states that for most Americans, cancellation will be done “automatically,” using information available to the federal government. It says the federal government “will work with those holding private student loan debt” to provide relief.

The feedback so far:

Though private student loan borrowers may complain down the road if the forgiveness process is slower for them, there hasn’t been much commentary yet on this part of the candidates’ plans.

Meanwhile … Don’t Hold Your Breath—Or Payments

Some borrowers might take this long-awaited political action on student debt as a sign that they should hold off on paying off their loans completely, and maybe wait and see what happens. Not to be a wet blanket, but the presidential election is more than a year away—and there is no guarantee, of course, that either of these candidates will be elected.

The newly-elected (or re-elected) president might not have a student loan forgiveness plan at all. Even if he or she does have a plan, it would have to pass both the House and Senate to become law. And before any plan eventually passes, it would likely go through some modifications.

In other words, this could take a while.

In the meantime, there are a variety of federal programs that may provide relief from student debt, from income-driven repayment plans to PSLF and other career-specific forgiveness programs for those with federal student loans.

Though borrowers with private loans aren’t eligible for those options, SoFi offers several private student loan repayment plans—including plans that require moderate, or no payments at all while in school. To make it even easier, you can complete the entire application online, and there are absolutely no fees.

A private student loan with a payment plan that works best for you might help make your payments more manageable. That’s a plan you can put your support behind any time you’re ready.

Want to see if a private student loan is right for you? Check out what SoFi has to offer.

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Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.

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