The American Rescue Plan Act signed into law by President Joe Biden on March 11 is 5,600 pages long. It contains one key provision that could impact MBAs and MBA student borrowers, authored by a trio of Democrats who are seeking to pressure the president to use his executive power to forgive tens of thousands in individual student debt.
The legislation included in the ARP introduced by Congressmen Jimmy Gomez (CA-34), Bill Pascrell (NJ-09), and Senator Bob Menendez (NJ) makes any student loan forgiveness tax free. Under current law, most student loan forgiveness — including forgiveness through federal income-driven repayment plans — is treated as additional taxable income, which often pushes borrowers into higher tax brackets and leaves them with a burdensome tax payment on their forgiven loans.
Many Democrats want President Biden to forgive $50,000 in college debt via executive order, something he has expressed reluctance to do. By making such forgiveness tax free through 2025 — relief that would apply to public, private, and institutional loans — the Democratic congressmen say they are removing one of the biggest hurdles to executive action. They say a family of four earning $100,000 per year and has $50,000 in college loans forgiven could receive more than $10,000 in federal tax savings under the provision.
MBAs COULD BENEFIT FROM ARP LOAN FORGIVENESS TAX RELIEF
The Gomez-Pascrell-Menendez bill would exclude the full or partial forgiveness of any college loan between December 31, 2020 and January 1, 2026 from a borrower’s income. Would that help MBAs? To find an answer, Poets&Quants turned to the experts.
In early February, the Penn Wharton Budget Model examined the potential impact of the $1.9 trillion Covid relief bill then being debated in Congress. Richard Prisinzano, director of policy analysis, tells P&Q that the final version of the law signed last week differs only slightly from what Wharton assessed six weeks ago, and therefore the model’s verdict — that the ARP will likely lead to an increase in output in 2021 as the plan’s expenditures stimulate the economy, but that GDP will decline in subsequent years “as the additional public debt crowds-out investment in productive capital” — stands.
As it pertains to the debt relief provision, Prisinzano says, there is a scenario where MBAs get relief — even if they are making a lot of money post-graduation.
“Currently, if I get a loan forgived, that is taxable income,” Prisinzano says. “This is true for student loans, this is true for all sorts of things — that’s taxable income. So I think the way that I read this amendment is, this is something that Biden could not do away with — even if you believed, and I think there’s legal scholars that believe this, that Biden could forgive a certain amount of student debt through executive action, he could not forgive the taxable portion of it.
“Let’s say I’ve gone to a very expensive business school, Stanford, or Penn, or wherever,” he continues. “I have a loan and it’s a student loan, so I’d probably have a very good rate on that student loan. So my incentive to pay down that loan is probably pretty low — I would rather pay more on, say, my mortgage or take some of that extra money that I’m not using to pay down the debt to invest in the stock market or whatever business I’m in. So that might be a fair amount of debt for somebody who’s very high-income.
“And so then that sort of distributional analysis of forgiving that debt, you might actually be benefiting people who are pretty high-income, which in our model would actually be a bit of a drag. Because again, it shows the increasing debt without really increasing investment, because they’re already doing that investment, the money they’re saving on the loans that are very low-interest.”
Prisinzano says that highlights another likely sticking point to executive action versus legislation: Across-the-board action that eliminates individual debt for all means that MBAs and others making a lot of money benefit in ways many might see as unfair or disproportionate.
“If it were legislation rather than executive action,” he says, “I could imagine there being discussion of, ‘Do we really want to forgive $50,000 worth of student loans for somebody who’s making say $250,000 a year and is strategically paying their student loan down slowly because it’s such a good interest rate?'”
ARP COULD BENEFIT MBAs THE SAME WAY IT BENEFITS MOST
There’s one other way recently graduated MBAs or MBA student borrowers could benefit — indeed, may already have done so — from the ARP: through the direct stimulus checks of $1,400 per person.
The key is income status. Most MBAs in the top three industries of consulting, finance, or technology make too much money to receive direct stimulus payments — that is, above the $75,000 threshold in the ARP. However, if MBAs or MBA students were out of work in 2019 or 2020 or paid lower salaries and filed taxes for those periods by mid-February, they would qualify for payments.
Direct payments are expected to go to about 159 million households, according to government estimates.
“I guess MBAs could receive checks potentially, depending on income amounts banked before business school,” Prisinzano says. “I’m sure there are some business school students who would be eligible for checks. My impression is that they work for a couple of years and then they go to school, and so their incomes might be past the threshold, so above $75,000. So that’s hard to say, but there’s certainly nothing in there that says that if you go to business school, you can’t get it.
“If, let’s say, you made money in 2019 and so wouldn’t qualify, but in 2020 you would qualify, and you filed your taxes as of February 12th-ish, you would then be eligible for the checks this time by saying, ‘Hey, I was fine in 2019, but look at my 2020 taxes.'”
He adds that there may also be rare instances where an MBA is working full-time to pay for business school, lost their job because of the pandemic, and then is getting unemployment benefits. They might receive additional unemployment benefits, Prisinzano says, some of which is non-taxable.
“I’m sure that, that also applies to some business school students,” he says. “Typically when you get unemployment, that is taxable income. The first $10,000, $10,200 is non-taxable for this year. So again, I’m sure there are cases where business school students would benefit.”