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Whose Debt is it Anyway? The PAC-Perspective by Ted Flint 8/31/22

In what many conservatives are calling the worst public policy decision of his Presidency (and that’s saying a lot) President Biden recently cancelled student loan debt for some 40 million Americans. Half of the nation, especially those who’ve incurred the debt, are ecstatic, the other half, not so much. In the interest of full disclosure, this writer is among those who will have a small amount of debt erased. One can understand the anger of those who chose not to attend college for whatever reason(s) the expense, being in debt, in many cases, for decades, etc. The fact remains they will have to shoulder some of the cost of other people’s decisions.

There is no shortage of memes on social media expressing the anger and frustration of those who are being asked to pick up the tab for other people’s education. From Facebook: “To be clear, there is no plan to eliminate student debt. There is a plan to transfer that debt to those who don’t owe it.” Or “If your college degree isn’t valuable enough to you to pay it off, why would you think I would want to pay it off?” And one of my favorites: “So, millions of Americans will have their debts paid off by tradespeople who chose not to attend college because they couldn’t afford it.” It’s hard to argue with the logic of their arguments.

Like most of what the federal government does today, cancelling student loan debt is just another wealth transfer scheme. Millions of Americans will benefit at the expense of millions of others. It’s how social security works, government-run health care, the income tax system, etc. French economist Claude-Frédéric Bastiat described it as legal plunder. A disciple of Adam Smith, Bastiat championed a free market and argued that law must safeguard rights such as private property, not "plunder" others' property. But Biden’s executive action has no basis in law. His decision to wipe out student debt is a big thank you to some of the 81 million people who put him in office. Its purpose is two-fold: it throws red meat to his progressive base, while purchasing votes so Democrats keep control of Congress.

As the Wall Street Journal put it, Biden’s student-loan write off “is an abuse of power that favors college grads at the expense of plumbers and FedEx drivers.” I can’t help but think a good chunk of Donald Trump’s support is part of the latter category while the beneficiaries tend to vote democratic.

But not everyone with debt will qualify.

From the New York Times: “The action includes rules that will maintain the balances of debtors who currently have high incomes. Those who do qualify will need to navigate the balky federal loan servicing system and keep a close eye on their accounts and credit reports for any mistakes.

It also extends the pause on monthly student loan payments, which means that borrowers won’t have to resume payments until at least January and provides details on a new proposal to create a more affordable income-driven repayment plan.

Individuals who are single and earn under $125,000 will qualify for the $10,000 in debt cancellation. If you’re married and file your taxes jointly or are a head of household, you qualify if your income is under $250,000.

Eligibility will be based on your adjusted gross income. Income figures from either 2020 or 2021 can render you eligible, but 2022 income will not. If you received a Pell Grant and meet these income requirements, you could qualify for an extra $10,000 in cancellation.”

As for when this all begins, the NY Times says once you apply, it should be no more than six weeks until your balance falls by whatever amount for which you’re eligible. By the way, the payment pause that has been in effect since 2020 is supposed to expire at the end of this year. So, you should have an application in by early November to get your relief before the bills start coming again.

To ensure the cancellation process is underway, look for messages from your loan servicer and be wary. Given the scope of this undertaking, millions of eligible Americans and billions of dollars at stake, there are bound to be hiccups. If you get a message that you suddenly have a zero balance or that your balance has fallen by $10,000 or $20,000, take a screen shot and print it out in case it somehow changes later.

The Times advises that “if your debt does go to zero, keep an eye on your credit report in the months afterward to make sure that your loan servicer is reporting that fact correctly. For instance, there should not be any notices of late payments that post after your balance shows as zero.”

You will not have to pay federal taxes on the cancelled debt. Discharged debt is usually taxable as income, but a temporary tax rule created an exception: Student loan debt forgiven from 2021 through 2025 doesn’t count toward federal taxable income. Depending on where you live, you may still have to pay state taxes on the cancelled debt.

Some states will track the temporary federal rule that exempts cancelled student debt from federal income taxes. But it appears that at least 13 states have the potential to make erased student debt subject to state income taxes, according to the Tax Foundation, an independent nonprofit tax policy organization. The Foundation says the final amount could be smaller, however, if states make legislative, administrative or other changes.

The maximum potential tax bill — for a typical borrower with $10,000 in canceled debt — would vary by state, ranging from $300 to roughly $1,100, a Tax Foundation analysis found. Considering the elimination, or rather shift of the financial burden, paying a few hundred dollars in extra taxes is a small price to pay.

Whether or not Biden’s vote buying scheme will reduce the federal debt as the Administration claims, appears dubious at best. In 1848 when Marxist revolutions were sweeping parts of Europe, Bastiat described the State,” as the great fiction by which everyone seeks to live at the expense of everyone else.” It sounds as though Bastiat was looking through a crystal ball at modern America.

Thanks to the New York Times for providing valuable information for this article.

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