Scrap Loan Fees, Make Forgiveness Tax-Free and Approve More Relief: A Look at Biden’s 2025 Budget Proposal

President Biden has taken several steps this month to push for reforms for student loan borrowers. Under several different proposals, Biden plans to reduce or eliminate so-called “junk fees” levied on borrowers under various circumstances, make student loan forgiveness permanently tax-free and increase funding for grants and the Office of Federal Student Aid. 

Meanwhile, Biden announced a new wave of student loan forgiveness for borrowers working in public service careers. At the same time, the Education Department moves forward to create a new student debt relief plan.

Here’s a breakdown of the latest developments. 

Biden proposes crackdown on student loan fees

As part of the administration’s 2025 budget proposal, Biden wants to eliminate a number of fees imposed on students and borrowers, including origination fees on federal student loans. Origination fees are essentially tacked onto a loan’s balance and must be repaid by the borrower, along with accrued interest.

“The President’s Fiscal Year 2025 Budget Proposal calls on Congress to end student loan origination fees,” according to a White House fact sheet. 

“According to the Office of Management and Budget, approximately 7 million undergraduate, graduate, and parent borrowers pay origination fees of 1 to 4 percent of the total amount each federal student loan is charged to every borrower who takes out federal money to help get an education. These fees are a relic of an era when the government compensated private lenders to issue these loans.  Today, this fee is nothing more than a tax imposed on students by the government, costing consumers more than $1 billion annually.”

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Other ways Biden's plan could change fees

Biden also proposes eliminating fees that students can incur in a variety of other circumstances. This includes:

• New regulations designed to end college banking fees, which the White House indicates has imposed “millions in high and unusual fees on more than 650,000 student account holders with college banking accounts.”
• New rules to prohibit automatic textbook charges. “Under the draft proposal, students would now need to authorize a charge on their tuition bill for course materials,” says the White House fact sheet. “Competitive markets provide consumers choice and value, but automatic charges for textbooks and course materials leave students with little ability to meaningfully shop around for better prices or to utilize free and open-source textbooks.”
• New regulations intended to prevent schools from seizing leftover funds associated with college meal plans. “The Department is formally considering regulations to require institutions of higher education to return any unused funds from Federal financial aid recipients’ meal plans back to students,” says the White House. Typically, unused meal plan funds are taken by institutions at the end of the academic term and not returned to students. 

Will the maximum Pell Grant increase?

Biden also proposes increasing the maximum Pell Grant award by $750 and increasing funding for the Office of Federal Student Aid (which oversees the Education Department’s federal student loan system) to $2.66 billion. 

The administration characterized this funding as “essential support to student loan borrowers as they return to repayment” to fund “critical improvements to student loan servicing” and will ensure the successful administration of financial aid programs. 

Is student loan forgiveness going to be tax-free?

The President’s Fiscal Year 2025 Budget Proposal also calls for making temporary tax relief of student loan forgiveness permanent.

While some federal student loan forgiveness and discharges are tax-free under federal law — such as Public Service Loan Forgiveness (PSLF) — other programs have historically been treated as taxable events for the borrower. 

Student loan forgiveness under income-driven repayment (IDR) plans and the Total and Permanent Disability (TPD) discharge program have been taxable. Borrowers who receive loan forgiveness under these programs typically get issued a Form 1099-C, requiring them to report their canceled debt as “income” for taxation purposes. This can devastate borrowers with large balances forgiven who don’t qualify for other tax exemptions.

Temporary tax-free student loan forgiveness will soon end

The American Rescue Plan Act, which President Biden signed into law in 2021 shortly after taking office, broadly excludes student loan forgiveness from taxation at the federal level (most states mirror federal tax treatment of loan forgiveness, but a handful of states do not). 

However, because this legislation was passed through a process called budget reconciliation, the provisions sunset at the end of 2025. As a result, loan forgiveness under IDR and the TPD discharge program will become taxable again starting in January 2026.

Biden’s budget proposal calls for the federal tax exemption on student loan forgiveness to be permanent. This would essentially treat discharges under IDR and the TPD program in a similar manner for tax purposes as PSLF going forward.

Biden approves additional student loan forgiveness, with new program forthcoming

While Congress must ultimately pass any budget plan to become law, President Biden has steadily approved additional student loan forgiveness for borrowers under current programs.

This week, the Biden administration approved another $5.8 billion in student loan forgiveness for 78,000 borrowers under the PSLF program. 

“The Biden-Harris Administration is proud to provide relief for another 77,700 borrowers who have given back to their communities through public service,” said U.S. Department of Education Under Secretary James Kvaal in a statement this week. “We hope this relief provides borrowers and their families some much needed breathing room.” 

The PSLF program has experienced a 100-fold increase in student loan forgiveness approvals during the last three years, according to administration officials.

What is the new student loan forgiveness program announced by Biden?

Meanwhile, the Education Department is marching ahead with a new student loan forgiveness plan under the Higher Education Act. 

The department completed negotiated rulemaking (a public process to develop new regulations) last month, and final regulations are expected to be released in May. The new program will target specific groups of borrowers, such as those who:

• Have been in repayment for a long time.
• Experienced negative amortization.
• Are facing significant financial hardships. 

Advocates hope the program will be formally unveiled this summer or fall before the November elections.