Less Debt, Now What?

October 17, 2022

LawHub, along with the National Bar Association Young Lawyers Division and the Iowa State Bar Association Young Lawyers Division, hosted this special webinar — an insightful discussion about the legal issues related to President Biden’s recently announced student-debt rescue plan. The conversation covered the legal grounds for the plan, who qualifies for loan forgiveness, what tax implications are across states for students, and the status and consequences of legal challenges to the plan.


Full Transcript

Kyle: Hello, everyone. Welcome to today’s events. I’m Kyle McEntee, I am Senior Director for the Prelaw division of LawHub from the Law School Admission Council, also known as LSAC. So many of you think of LSAT as a testing company, and for good reason, we make and administer the LSAT. But we’re much more than that.

We provide tools provide resources and put on events, all designed to help students and lawyers, young lawyers, support them to support them through the legal education journey from prelaw into law school and into practice. So today, we’ve again, we’ve got a really great event in store, so I’d like to ask the panelists to turn on their cameras at this point. So today, we are moderated by Ashley Lee, the chair for the National Bar Association’s young lawyers division. And we’re also joined by Charlyn Stanberry, who is on the National Bar Association’s board as well as an ABA Wildy scholar. We’re also joined by Kyle Fry, the president of the Iowa State Bar Association, young lawyers division, and Jed Sugarman, who is professor of law at Fordham Law School and currently visiting at Boston University. So, I’ll hand it over to Ashley now and everyone can turn off their cameras other than Jed, but thank you all for joining us. And feel free to ask questions in the Q&A throughout and Ashley will be moderating and be able to get them to the panelists at the right time. Thank you so much, Kyle. And good.


Ashley: Good afternoon, everyone. Super excited to be here today to talk about a very important issue, right, less debt. Now what? So, we’ve all heard the announcement from President Biden, regarding certain student loan debt relief, this is a one-time opportunity that as being provided by the US Department of Education as part of the Biden/Harris, student debt relief plan. And so today, we want to dive a little bit deeper to understand what the plan says some of the legal challenges, and if there’s some tax implications, and so we’ve got a great group with us today. And so, let’s dive right on in. You know, there’s up to $20,000 in potential debt relief, if you received a Federal Pell Grant in college and you meet certain requirements. If you didn’t receive a Pell Grant, there’s another opportunity for up to $10,000 in debt relief if you didn’t receive that Pell Grant, and you meet certain requirements. And this does apply to loan balances you had before June 30, 2022. And so, let’s talk a little bit jet. About what are the legal justifications for this student debt relief?


Jed: Well, the Biden administration has relied on the statute, right. So, they have to start with statutory authority for this executive action. And the statute they’re relying on is the heroes act of 2003, which was a post 911 statute, and they refer it they’re relying on a very specific provision relating to emergencies under that 2003 Act. And one question I have is there’s another statute and I support this program. But let me just say my concern is because I support this program, I am worried that because of the Biden’s Biden administration’s reliance on that statute, a post 911 statute, as and not another statute that is more closely related to the purposes, the long-term purposes of this debt relief program, that’s the Higher Education Act of 1965. I’m worried that when this gets to the courts, it will be first stopped, it will be enjoined, so that none of the relief will get processed this year or next year. And I’m worried, frankly, that the Supreme Court could either rule against it by the conservative majority of 63. But there’s a potential that it could be ruled nine zero to be an impermissible executive action. And just to say briefly about in a little bit more about that. We can talk about standing after this, but the Biden administration itself has made an what I would call a frustrating and arbitrary change to the program since it was announced, because it seems like they have the same worry that I do, instead of fixing it, though they are solution made the problem worse. You may note that the program now says that it’s only the only student debt holders whose debts are held by the federal government may apply private debt debt that may have initially been through the federal government but then outsourced and managed are serviced by a private bank, that’s ineligible. The reason why they did that is because they’re concerned that those private debt servicing companies have standing to challenge the program, because they’re losing out on contracts and all the investment, they made in managing that debt. So, I can say a little bit more about the legal arguments, but I just wanted to lay that out there as the as the big picture problem.


Ashley: No, that’s, that’s awesome. And, you know, as a lawyer with law school debt, you know, I’m certainly, you know, supportive of this program as well. But let’s, I’d certainly want to understand more about the legal challenges, that, you know, have you worried as a scholar in this area, as well as myself as someone who has some student debt?


Jed: Sure. So, the the one big problem that is likely to lose six justices from the get go, just to give a little more background here, this, the six conservatives on the court come in skeptical about the Biden administration’s use of a pandemic emergency for programs that were directly related to the pandemic. So in August of last year, so August of 2021, the Roberts Court struck down the eviction moratorium, which was very closely related to the pandemic and making sure that people were not kicked out or evicted from their homes in the middle of pandemic, that Roberts Court struck that down as being something called a major question right to to block property owners from using or declaring who can, who can live on their property is a pretty significant choice for those homeowners. Right. So that that was the Roberts Court struck that down. And they also struck down the vaccine or test mandate, often called the vaccine mandate, that these two programs were directly related to the pandemic and had a closer connection to the statutes and the kinds of agencies that relate there. And so, the same problem is here is that this is a major question. Or the Roberts Court will look at this as a major question. What does that mean? So, the in the past, the up until I’d say about 10 years ago, the dominant approach to statutory interpretation, and looking at how an administration would review a statute, courts would review the executive branch’s interpretation of statutes, there were two moves they would make. The first move is to give deference something called shift you’ve taken administrative law. I’m sure the concept of Chevron deference is familiar. So, they would if you had a an open ended or ambiguous passage, like about emergencies, you would defer to a reasonable interpretation or permissible interpretation by the administration. And the second step was many just justices, as Elena Kagan said, we’re all textualist now, and there, they would have a very textual word-based approach to emergency. Well, those two steps would have gotten the Biden administration pretty far here, let’s say 20 years ago.

The problem is a lot has changed over the last 20 years, both in terms of the personnel of the courts, and the doctrine. Chevron is more or less, it hasn’t been announced as dead, but Chevron is basically dead or if it’s dead, when it relates to a a big if it’s a big deal. That’s the major question doctrine. The major question doctrine is basically, we are in these cases, the Roberts Court no longer cites Chevron deference. And the reason and there’s actually a good reason why they don’t I mean, I there’s a lot of critique of this doctrine. But there is something common sense that if a if a program is a is not a big deal, the judges don’t and the statute is not that big a deal to mind, let’s say a minor question. The judges don’t have the capacity or the time or the need to spend a lot of time digging. And so, it’s almost like a resource management question and expertise management, it’s not a big deal, then we will let the statutes text and and the very esoteric details, the technical details, will defer to the experts on that. But if it’s a big deal, if it’s if it’s the ACA, otherwise known as Obamacare, if it’s eviction moratorium, if it’s a vaccine mandate, that’s going to affect 85 million people. The statute is big is a big deal. It’s enough of a big deal. And the legislative history can be clear enough that the judges will take a look and more than the text, but the look look at the purposes. And the second step is that they’ll say if it’s such a big deal, we’re not going to defer to technical expertise. This is a big quote political. Is this a question of vast economic or political significance? That’s the line that goes with the major question doctrine. And so the problem is that when you go past just the word emergency in the statute they’re relying on the larger context is a 911 emergency. And and the Roberts Court is likely to say they didn’t write the statute to be about aftermaths of let’s say, a pandemic or about about long-term issues.

So that’s the first problem is that, that we’ll probably lose six votes off the bat when this gets to the Supreme Court. And the second problem is one that I think the liberals, the left wing of the court will will find problematic, which is that I think everyone knows it doesn’t pass the smell test that this program is about the COVID. And that’s why I support the program is because it’s not really it’s I support debt relief, because I agree with how Biden announced the program, we have a massive long term problem with this with the escalating costs of law school and undergrad, it’s across the board. And that’s how Biden introduced the program. He said explicitly, we have a critical problem, long term problem here. And he only mentioned COVID impact, like once in passing in the announcement. So, the question, I think, is pretty clear that the reliance on a COVID emergency is is the pretext. It’s not the it’s it’s the statutory argument, but it’s not the real reason. And so, when the court heard a case about putting the citizenship question, this is the Trump Commerce Department.

When the Trump administration was trying to put the citizenship citizenship question on the census, liberals rightly challenged it and said, you know, this is motivated by partisan and also racist goals here, and the Liberals plus John Roberts at the switch to the very last minute when they discovered a smoking gun, that this was about a partisan motivation, and it didn’t fit the real. So, lots of arguments that the Trump administration made. The the four liberals plus Roberts ruled against the Trump administration. Well, I think those liberals now we’re going to have to say what’s good for the goose is good for the gander. So, and it’s not just those liberals that Biden administration’s lawyers have conceded as much. So, I wrote an article explaining some of these arguments in the Atlantic. And if you if you want to see not a feed off, subscribe, but in the OLC memo, the OLC as the lawyers who make the arguments for the Biden administration, they acknowledged on page 18 of their memo, that there has to be a direct causal link, there has to be a what they use that to be but for causation, if that reminds everyone here a first year torts, right, there has to be but for causation from the pandemic, to then the language of the statute of debtors being quote, made, made put in a worse position, because of the emergency. Now, let me just say, just, you know, there are two solutions. And I am disappointed that the and I’ve, I’ve written those, I’ve written about these two solutions for a while, and I’ve been talking to other people involved, and there were two solutions. And the Biden administration seems to not take either of these solutions. One is simple.


Ashley: Before we go to the solution, I want to make sure that folks understand, you know, you’ve spelled out the legal argument, but where do you anticipate these challenges coming from? And do you anticipate more challenges may be coming down the pipe? We’ve all read kind of the news and saw some of them coming?


Jed: Right. I mean, the answer that I have heard from the Biden administration and many advocates is that well, I may be right. Many people agree with my assessment of the legal problem here. But their argument is, well, no one has standing. Why does no one have standing? Well, this is this is the federal government paying out money. It’s an outlay of $300 billion dollars, and the parties that would have that might be complaining about this, our taxpayers, and there’s no such thing as taxpayer standing for this kind of program. And they’re right, this taxpayers don’t have standing. But what I’ve indicated and others have have also been concerned about is that there are parties and to get standing, you need a direct and concrete injury. Well, the debt servicing corporation, so the federal government manages some programs, but it’s outsourced a lot of this debt to private, private debt servicing corporations, some of which are entirely private, and some of them are quasi state corporations, for example, Missouri is one of them.

So, they have standing to say that we’ve now invested this, we’ve invested money and resources and office space and employees to manage and we get a few dollars in the standard way the program is Ron every month, and if they’re late fees, etc. So, they have their those there are seven state based corporate states that are suing because of those impacts. And here’s that so that’s that’s, I think the best case the best- or worst-case scenario, they I think they have standing now they have had standing whether there they may have standing regardless of this line being drawn. But let me say one more word about why this move by the Biden administration that they thought was a solution to the standing problem, made things a lot actually made things a lot worse.


Ashley: So that’ll get us into, like their chances of succeeding as well.


Jed: Right? Yes, that’s right. My my concern now is that what so by making this line between those who hold the debt, those whose debts are held by the federal government versus the debts held by a private corporation, now that as a matter of administrative law and constitutional law, you can’t make arbitrary you can’t draw arbitrary lines, right? It’d be like saying, the people who borrowed money in an 11 year get debt relief, but the people who have borrowed the money in an odd year, you don’t get debt relief. Now, it’s not, you know, we know that it’s not really arbitrary in a political sense. I mean, they’re trying to avoid in a legal sense, they’re trying to avoid standing, but the law would not regard trying to dodge standing as a legitimate line. So that means step one, any debt holder whose debt is held by the by a private bank has standing to challenge that line? Well, you might say, okay, well, then a court will say, okay, that line is arbitrary. Let’s get rid of that line. Not so fast, then the private banks who know that that line was was drawn to prevent them from extending now they get standard, because the remedy would affect them. And so, my, my unfortunately, my prediction is that a court, a trial court, federal trial court somewhere in America will will enjoin, that program will freeze it, and it will be litigated, and then the Supreme Court will strike it down in May or June of 2024. Right before the presidential election.


Ashley: Wow. And so then what happens?


Jed: So you, you know, there’s, yeah, so no one gets anything and all of the plans that people have been making, hoping that, you know, making plans about how to, you know, use this, this, this money, they just got will be immensely and rightly frustrating, because this was a series of unforced errors by the Biden administration.


Ashley: So that’s the worst-case scenario, right. If we wanted to assume that, you know, this, this succeeds. You said you had a couple of solutions. So, let’s, let’s circle back to some of those solutions.


Jed: That sounds great. So, circle back now, I thought you met later. Sure. I mean, the problem is, I think that the shipmate that the train may be leaving the station, I mean, as soon as the program is, there will be a moment and that moment is soon when the program is final. And I think you can I mean; I think the program is about to be if you can now start applying. I think the so the question is when the program is final, you’re stuck with the arguments that you made. I mean, this that’s a matter of administrative law cases called Chenery, Chenery 2 and the case about DACA. In regions, the Trump administration tried to, you know, rescind DACA. And they made bad arguments, or they made insufficient arguments initially. And while it was being litigated, a new Secretary of Department of Homeland Security, Kirsten Nielsen, tried to fix the arguments later. And and the the Roberts Court, five to four said, everyone agrees, but when it ruled in this way, it said, we can’t count any arguments made after the program after the rescission was announced. So, you can’t fix it in litigation. We want to know your reasons when you made the program. So, I am concerned that my fixes are it’s too late. But the one fix would have been simple to start, if you really if the program was really about the pandemic, that even if even if they had multiple motives, they could have designed the program where debtors could have there could have been a forum where you have to upload three years of tax returns and if your income went down, for many people, it did, right for many, many people went down from 2020 to 2021 to 2022, or 2020 2019, 2020, 2021. If it went down, you’re in a worse position correlated with a pandemic. And that kind of personal correlation should have been enough for simplicity’s sake. Or you could check a box, you know, I work in this sector, my degree was in this sector, and for someone whose sector you know, many sectors were impacted, not everyone, if you if you worked in the pharmaceutical industry, or the mask making industry or the zoom industry, you did better. But that question was crucial, so that it wasn’t simply everyone gets debt relief, regardless of an industry, any kind of individuation about how the COVID how COVID correlated or caused you to be worse off so that that ship may have sailed, unfortunately and the second ship the second option was to rely on the Higher Education Act of 1965, which is about the real point of the program. It’s about general long-term access to higher education. The failure to use that program was partly driven by timing it would have taken an extra year from August of 2022. Then being you know, would have taken a year to reach to receive some of the old rules and create some new interpretations and some new rules by executive action. That’s notice and comment that’s negotiated regulation. That’s complicated. It takes a year. But where there’s a when it comes to regulation, there’s a way to get to it. And I, frankly, am puzzled why they wouldn’t have tried that second option, either option, either, either solution one or solution two. But anyway, those I just wanted to just say that there was there was a better way to go.


Ashley: You know, hindsight is always 2020. Right.


Jed: But this isn’t hindsight like this is. This is. I mean, so the problem, let me just say one more thing is that many advocates and I was and I started looking at this much more closely, because I was surprised a lot of us were surprised. The people I’ve talked to who have been more directly involved with this debt forgiveness program, have been saying for years, I mean, from the campaign of tour from the Biden, Bernie Sanders, Elizabeth Warren campaign, they were all pointing at the statute that I’m talking about. This isn’t my idea. This was Elizabeth Warren, Bernie Sanders use the Higher Education Act of 1965. So, in foresight, this was the this was the plan. And for strange, for, for surprising reasons and disappointing reasons. The Biden ministration preferred to rely on an emergency justification. And the reason why that should also bother many people is that, you know, I spent four years complaining and yelling about the Trump administration misusing emergencies to build an unnecessary border wall because of a manufactured emergency at the border. The Muslim ban, a morally abhorrent policy by the Trump administration was an abuse of of a manufactured emergency. The family separation policy at the border. What, right, so if liberals are serious about the risk of you know, of executive branch of presidents, abusing emergency powers, we’ve seen this movie before. And it gets worse than building, you know, building a silly wall. So, let’s assume this is the point to take a stand now and say, no, we don’t want to use an emergency power. We know that the program is about long term as a long-term problem, not an emergency. And we want to use the statute designed for addressing and solving this long-term problem.


Ashley: Let’s assume for argument’s sake, because you’ve set out all the arguments, you know, you’ve given us a solution, how the Biden administration can move forward, and we’re so grateful for that robust, I feel like I just went back to law school and had another administrative law refresher. So, thank you so much, Jed. But let’s bring on Char to kind of talk about if the program succeeds. What does it mean? Like now what? And so, Char, kind of walk us through? You know, what happens if this program succeeds? Who qualifies our refi loans, you know, included, you know, what’s going on?


Charlyn: Yeah, thank you, Ashley. I know everyone was email was on fire last Friday night, because last Friday night is actually when the Biden Harris administration did a soft launch of the student debt loan relief application. And so, when you say what’s the soft launch, basically, they’re doing beta testing. So, it’s the site may be up, sometimes it may be down. But for an individual who is able to fill out that application, while the site is actually up, than they’ve already done, all that they should do for the application. So, the application as we’re looking at it, it’s kind of short, sweet, simple. You can go to student aid.gov. To look at it. And basically, it’s just asking you general questions like your name is, you know, it’s not asking you anything specific, you don’t really need to any attachments in order to fill out the application. And you can do it on your desktop. Or you can do it via your phone if you want to.

So currently, they’re doing the soft launch. The rumor mill is that as of next week, so the end of October, we could possibly have the full application available. And the application is going to be up from October of 2022. So, this month, until December 31 of 2023. So, what a lot of people have been doing is just going to the website, see if they can fill out the application. But as I’ve been screaming to my brother and everyone else who’s eligible, like, keep checking the website, keep applying if you get the opportunity as soon as possible.


Ashley: That’s that’s awesome. You know, I’ve been telling folks to post it on Instagram, but let’s talk about who is actually out eligible because not everybody is eligible to even take advantage of this opportunity. So, can we talk about those qualifications?


Charlyn: Absolutely. So, and Ashley, you’re perfect, you kind of alluded a little bit to it in your intro. So, as we’re thinking about debt, and how much debt relief you can get, you can get up to 20k. In Debt Relief, if when you were in college, you received the Federal Pell Grant. And then you can get up to 10k If you’re in college and didn’t get a federal federal grant. So, when it comes to who is eligible, right, we’re going to be looking at the adjusted gross income of the years of 2020 and 2021. For different types of people. So, if you’re single, you have to make under 125 grand if you are married, but you file your taxes separately, then you have to make the same under $125,000. If you’re married, but you file your joint, your taxes jointly, you may have to make under $250,000. The same goes if you are head of household are you are a qualifying widower. So, like I mentioned before, they’re going to be looking at your AGI or adjusted gross income from the years of 2020 and 2021.


Ashley: So, folks probably need to go, you know, to your email or to wherever you store your tax returns, find your 2020 tax returns, find your 2021 tax returns and look at that adjusted gross income line and see what the number is and then compare it to what you the guidance that you just gave us. And I think that’s also listed probably on the student aid.gov website, too, if folks didn’t catch all that, because it is not always simple, right? It’s not just everybody gets it, contrary to what we’re hearing on the news, but it’s certain folks who make certain amounts of money are eligible. And so, you know, can we talk a little bit about because I don’t think it’s all loans, right? Char it’s only certain loans. Right? Can you talk a little bit about some of the loans that may be you know, qualifying for this student debt forgiveness, because some folks may have re-financed, I know I refinance some loans a while back.


Charlyn: You have me thinking back to my law school loans, and I need to check. So, you know, when you’re thinking about what type of loans qualify, it’s federal loans. So, if you if you have any private loans, this does not qualify under the debt relief program. For people who may have refinanced their federal loans into private loan, you wouldn’t qualify either. So, you know, a lot of people, they may refinance to Sofi, or light to a private bank, because it’s just easier for them when it comes to managing their debt, particularly if they have like multiple federal student loans. And the other thing about why some people may have finance is because they may get a lower interest rate than if they were still managing all of the multiple federal loans that they have. But unfortunately, this if you have private loans you wouldn’t qualify for this program is solely for those federal public loans.


Ashley: Okay, so just to recap, we’ve got income requirements, there’s a certain type of loan requirement, private loans are not included. And then, you know, there’s, it seems like there’s an application process to be able to take advantage of the student debt relief program. But what about those folks who, you know, there’s there’s been the kind of the pause on the payments for federal loans. What about those folks who continue to make payments during the pause period? What about those folks?


Charlyn: So, what’s interesting about that is, for example, when I was working on Capitol Hill, a lot of my loans are actually paid from the hill from my salary from the hill. And so those payments were still being made during that moratorium. So, if we look at the dates of when the moratorium or the pause occurred, that’s March of 2020, up until probably the end of this year, right. And so, as far as people who have continued to pay during that pause, the Biden Harris administration already had announced that if we needed a reply on for, you know, some of the payments that you’ve made, you will be eligible for resign. Now, the thing with the refund is still going to bring your student loan balance up to what it was. So, for example, if your student loan balance was $8,000, and you made a payment of $2,000, during the pause, and we want to get a refund, that 2000 is not going to maintain your student loan balance to six K gonna go back up to the 8000, that it was. Now the interesting thing about, you know, talking about the pause, and then also talking about this student loan debt relief application program, if it does occur correctly, if you, for example, make payments for your loans, and you can’t like $9,000 in loans left, and we still make payments, and then you’re eligible for the 10k. Right, so the 10k loan forgiveness. So, if they apply that 10k, loan forgiveness to the $9,000, that you already still have as a balance, then you may be refunded that $1,000 that you paid during that pause and that moratorium. But a lot of these changes, and a lot of this information is still being worked out. So that’s why they continue to push for everyone to go visit the Department of Education website, and that student aid.gov website.


Ashley: Awesome. And we’ll drop that in the chat. Because it does seem like this information is changing in real time. And so, it is important for folks to make sure that they’re checking out the website on a periodic basis to ensure that they’re getting accurate information and up to date, information on regarding this program. So, thank you shar, for you know, giving us that that high level overview, given us the details, helping us understand, you know, how we go about, you know, taking advantage of this program, how we may qualify what what we need to do to get ready. Let’s look at those taxes. You know, today’s is the tax deadline for those folks who who filed an extension. So, you know, for your 2021 taxes, so make sure, you know, you’re you’re taking advantage of all the opportunities that may be available to you as a young lawyer. So, you know, I remember when I was in tax in law school, I took a tax class and you know, debt forgiveness is sometimes taxed. So, let’s bring on Carl Fry to talk about whether or not this student debt program is going to have some tax implications. So Fry, do we have to pay tax?


Carl: Yeah, so generally, anytime that the there’s recourse debt, which is debt someone is personally responsible for and it’s forgiven, it becomes taxable, the full amount that was forgiven. So, section 108 of the Internal Revenue Code is the appropriate code. And for those that are not tax attorneys, you’re gonna glaze over for the first minute or two. And we’ll we’ll walk through some concrete examples for you. But like anything else in the tax code, it’s not exactly intuitive how it applies. So, section 108 provides for items that are specifically excluded from gross income. So, in other words, if something is not found in that section, then it is included in your gross income. Now, section 108 F applies specifically to student loans in the context of debt forgiveness, until 2021. And that date is very important here. That section provided that only those student loans discharged, quote, if the individual worked for a certain period of time, in certain professions for any broad class of employers, that was not treated as taxable forgiven. And that’s where our PSLF loan forgiveness program comes from, and having that not be taxable.

So now that we have a very basic, very common understanding of the very complicated rules for taxes, what does it practically mean for you, folks? So, let’s walk through a couple examples. If I have a debt that I’m responsible for, and I decide not to pay it, then the person that loaned the money is not likely to be happy with me. Also, they will likely threaten to sue me or their legal department, if they are a large organization, they may actually sue me, they may even win. At any point in time, they may decide that while I owe them money, they are just not going to get the bang for their buck by pursuing me for that money. And they decide to forgive it, which is great. I don’t owe that money anymore. Correct. That’s the natural intuition that anybody has. Well, Congress and the IRS and Treasury have decided that the amount that was forgiven is actually income to me and needs to be reported as income to me.

Why? So, it goes back to earlier iterations of section 108. And the first time that the Supreme Court weighed in on this was in crane, the commissioner and will provide citations afterward, where the is forgiven debt was recognized as income. And it was challenged and was ultimately upheld by the Supreme Court.

Section 108 is largely still the same as it was back then, in the sense that it included those gross income items based on the way that we talked about them earlier. So very simply, in that case, there was a property with a mortgage that was sold for less than the value of the outstanding mortgage. And the bank, the lending group at that point in time decided to forgive it. And the differential between the undersell and what the property was worth was the amount the individuals taxed for.

Now, when I remember, sitting in tax class learning this topic, I was not the only one in the room, but it’s very counterintuitive. I never received the income, how can that be a benefit, and I’ve had this actually come up in my professional life as well, in my 11 years of practice, where people argue about it, and then you show them that the the Internal Revenue Code section, you show them the case law, and they sort of just have to look at you and think, you know, Congress does what it does. So that money that was owed to someone, and I didn’t pay, it is actually the benefit that Congress in the IRS is chasing after. So, I obtained a measurable, measurable monetary benefit from that forgiveness and the exact amount that was forgiven. In other words, the money was provided to me on the premise that I would repay it, I was able to spend it for whatever other reason I wanted to, and I never repaid it.

So, let’s walk through an example. Actually, I’m going to assume that based on our arrangements prior to this call, that you were a very generous person, and that you’re willing to give me $10,000. Today, similar to the loan forgiveness, whether or not you are is irrelevant here, but let’s play along. So, I also promised to repay you. Now let’s assume that I don’t repay you at all, however, you decide that our friendship is worth more than $10,000. And that I don’t have to repay it. Which is again, great for me. However, let’s assume that my income before you forgave that amount was $50,000, for the entirety of that year, after you forgive it, it will be about it will be $60,000, because I obtained the benefit of using that $10,000 without actually repaying it to you according to my promise. So, in many instances, that can add up to three to $5,000 to your tax bill, depending on the state you live in. That’s not great, because I didn’t plan for it. Now, where the difference comes in, in 108 F, is that the federal forgiveness for student loans, if you had actually loaned me that money to pay off my student loans is different. And we’ll walk into that a little bit.

So, I want to touch very briefly on the difference between recourse and non-recourse debt, they are treated differently from a tax forgiveness reporting perspective, recourse debt is the debt that I’m personally responsible for the personal guarantee portion that you’ll see in promissory notes. If something is non-recourse, it’s collateral only and like anything else in the law, or as we practice the answers, whether something is recourse or non-recourse is dependent upon the state.


Ashley: Awesome. So you mentioned that this program may be a little bit different, right? So can we talk a little bit about how the program is different?


Carl: Certainly so the American Rescue Plan act of 2021. ARPA, modified the treatment of student loan forgiveness for any discharges through through 2025. As we previously discussed, these loans would ordinarily be treated as taxable income, if forgiven or paid by someone else, however, are explicitly carved that out and says they are no longer subject to federal income tax reporting and payment. Specifically, section 9675 of ARPA added additional language to Section 108 F of the internal revenue code from the period running from 2021 through 2025. Loan Forgiveness is not taxable, if any of the following applies. And I’ll only cover the one that’s at issue here. And it’s loans issued for post-secondary education by the United States. So, in theory, you could actually have your loans paid by anyone, and it would not be treated as taxable under ARPA. At least at the federal level.


Ashley: Okay, so just to recap, so potentially, there are no federal tax implications based on the law that you just kind of gave us an overview of what about on the state level are their taxes there.


Carl: So, like the difference between recourse and non-recourse and anything else? They said it’s on attorney’s practice. The answer to that is it depends. And the reason for that is due to a concept commonly known as tax conformity. So, in order to streamline the filing and reporting of taxes, many states have adopted legislation that have their state tax codes, automatically mimic any changes made to the Internal Revenue Code by Congress. However, a number of states do not follow that statutory scheme. In effect, what that means is that the handling of forgiveness is state specific in those states that do not follow that approach. Now, I’m sure those that are living in the States have seen articles and discussion about that as it relates to their state income taxes. But there have been numerous articles on this subject. And there are seven states that have come out so far in one way shape, or form and said that they will tax the benefit at a state income tax level to some degree. And it’s not they’re not intuitive, other than maybe they’re all states that really likes to have their residents pay taxes and take credit for things. So, you have North Carolina, you have Indiana, California, Mississippi, Arkansas, Minnesota, and Wisconsin are those states that are commonly either raising their hand indicating that they will assess that as income to the forgiven borrowers, or there’s a very clean argument under their state laws and the regulatory scheme they have that it can be taxable. But I’ve also seen estimates and other locations were up to 19 states may tax the forgiveness based on their statutory schemes. So likely, in addition to those other states that we talked about, states could and some of these have come out and said that they will not but at least their statutory schemes allow it could adopt it as taxable. So, you have Oregon, Idaho, Iowa, Wisconsin, Ohio, Kentucky, West Virginia, Maine, Vermont, South Carolina, and Georgia.


Carl: Now, each of those, the reason for that is because they have a selective statutory scheme, where it’s really up to either their department of revenue or their legislature to say, well, anything that took place before this, we’re not going to touch but if the federal government looks at this later, then we reserve the right to go back and look at additions made to the Internal Revenue Code or subtractions.


Ashley: Okay, so the state tax level is a little bit more complicated depends on where you are in the States, to whether your your state has, you know, these types of opportunities to tax you. So, what can young lawyers do? What strategies? Can young lawyers and people who were eligible for student debt relief, what can they deploy to minimize their tax liability or their tax risk?


Carl: So, for those that are in states that are not clear or have come out and said that they will tax it, you still have, effectively two and a half months to advocate that your state adopts legislation that rules this out altogether, so you don’t have to pay income tax on it. however unlikely that may be.

However, what you really should be doing is if you’re going to pursue the forgiveness program, you should start considering planning financially around it. If you’re getting a $10,000 tax benefit, states are going to charge you anywhere from $300 to probably $2,000 next year for your income derived from that this year. So, start planning for that making sure that you have the cashflow necessary to make sure that you can pay that when your state taxes are due.

Your strategy really is to make sure that you have those funds available. And while some of the profession in the profession will view the $300 to $2,000 payment as nominal, you’ll want to make sure that you begin saving up.


Ashley: So yeah, so you know, maybe set up a special savings account or something, talk to your financial and tax advisers to help help manage those potential risks. Got it? Thanks. Thanks, Kyle, for those tips for helping us understand some of the state law tax implications that overview of federal tax definitely reminded me of my my fed tax days in law school, so I’m certainly appreciative of that, that guidance. So, let’s bring back on all the panelists. And let’s kind of do around the horn with the minutes that we have remaining. You know, so, you know, maybe one minute for each of you. What’s next, you know, who does this help? You know, what should we be doing as young lawyers, and we can start with whoever wants to go for us or I can pretend that I’m the Law School professor and call on somebody.

Jed you’re it. Okay, got it.


Jed: I mean, I said a lot early on about what I think happens next. And I’ll you know, I’ll reiterate that I that my expectation is that this is what happened. This is what happened for years under the Trump administration is that a left wing groups would would find a friendly district court and get a national get a an injunction on the Muslim ban or get an injunction on this or that family separation policy and be a nationwide injunction.

I can’t tell you exactly which plaintiff will trigger that. But I expect in the next month, I mean, there already is that. So last week, the seven-state quasi state corporate states with with the quasi state quasi private, outsource loan, servicing corporations. Were in court. And frankly, I would, I would guess that that would trigger a nationwide injunction against any outlays any any any debt forgiveness actually happening. And then we all wait for it to work its way up to the to the Roberts Court. And that would be on the docket in the fall of 2023. And then likely decided in the spring of 2024. And it would either be six to three, or seven, two or nine. Oh, you know that none of the basically none of this is going to matter. I can’t say that for 100%. But I would be shocked if the program ever goes into effect.


Ashley: Alright, so we’re holding our breaths to 2023. Right? Not literally, but. But what will you know, sir, in this limbo period, Char, what do we do while we’re in this limbo period?


Charlyn: So, while we’re in this limbo, period, go fill out your application if you qualify. So that’s my summary, more or less, you know, once it’s the soft launch right now, once the full application is up, probably be the end of this month, go out, fill it as soon as you can, and tell all people who qualify also to go ahead, fill it out as soon as they can.


Ashley: Alright, so we’ve got our advocacy hats on, you know, if you qualify, fill out the application. Kyle, do you think this is going to happen? Again, you’re you’ve done a lot of research in this area. What are your thoughts?


Carl: I think when they passed ARPA, that they certainly anticipated that it would happen, at least some points between 2021 and 2025, I don’t think it’s likely to happen again, for a variety of reasons, if only because of the political costs that will end up being endured. But I think one thing that anybody on this webinar or other, you know, attorneys in general can do is, you know, graduates come out now with $160,000 On average of debt, so $10,000 of that, while it is a significant aggregate number, it’s not a significant percentage when it comes to that amount. And law schools don’t charge prices evenly to two people of color, and to men and women and other categories. And so making sure that you are engaging in efforts that really fix the the underlying cost here is going to be equally as important moving forward.


Ashley: Absolutely in whether it’s joining the Iowa State Bar Association, young lawyers division, if you’re in Iowa, if you were, you know, the National Bar Association, young lawyers division, or even the American Bar Association, young lawyers division, you know, it’s time to get involved if this issue is important to you. We’ve heard the advocacy opportunities. So, there’s work to be done on this issue. We’ve got a few minutes left, do you want to take a few minutes to open up for questions to these outstanding panelist? So, if you have a question, feel free to drop it in the chat. And we can have those questions addressed.

While folks are, you know, typing up their questions, Jed? You know, I’ll start with the view. You know, you said, said a lot here. What do you if you had a crystal ball, and you can see the future? You know, let’s expound a little bit on what the future would look like.


Jed: Well, you know, one, one possibility here is that is that when the Roberts Court rules on this, and strikes it down? Does it lead to more recognition that this has to be addressed by Congress? And then what would Congress look like, in the future? Will this be the kind of issue that mobilizes more voters? And would it also lead to more candidates to campaign on it and win on this issue? So that’s, I think, the long term the if I have to try and take some lemonade from the lemons I see here. I would rather this is all even if this program goes through, it’s just a band aid. I mean, you know, so what I’m hopeful for is that is that you know, that this experience of watching the incremental ism of band aids just gets torn off, tear that band aid off and go vote for a more a less incrementalist candidate who, regardless of which party and will push for a statute that will avoid the major question doctrine, and it’s whether by text or by purpose, etc. It’s clear that there should be long term change moving forward, and that there would be a basis for cancelling the debts effectively, let’s say in 2025, that would be my hope.


Ashley: Absolutely. You’re speaking my love language, Jed. You know, vote, vote, vote, vote vote. We’re not telling you who to vote for. But we’re just saying you know, vote for those candidates that reflect the issues that are important to you. on Election Day is November 8 is coming up. Check your state’s websites to understand your voter registration deadlines, if their deadlines, understand how you’re going to vote, make that plan, whether it is by absentee, mail-in, early in person voting or on election day. So that is a great way to conclude this program.

And we will bring Kyle back on to help come and close this out.


Kyle: So thank you, everyone, so much for your participation today. I know I learned a lot. And I came to this webinar with some knowledge already. So, you all blew me away. So, I really appreciate all of your time. I also want to thank the ACIP Bar Association’s for their sponsorship of this event and the help planning it so especially the National Bar Association, young lawyers division and the Iowa State Bar, young lawyers Bar Association, and then also to our friends at the ABA young lawyers division, who are always great partners here. So, I’ll just close out by saying just keep an eye on law hub for the things that can help you and support you, wherever you are in your learning journey from preloader practice. Thank you.

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