New Stimulus Package Makes Student Loan Forgiveness Tax-Free

 March 11, 2021
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Stimulus Student Loan Forgiveness

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Student loan forgiveness wasn’t included in the new $1.9 trillion stimulus package, but support for borrowers could still be on the way — and at least there’s a tax break.

Within the American Rescue Plan Act — in addition to economic impact payments (also known as stimulus checks), unemployment benefits and child care tax credits — is a less-known provision that makes federal, private and institutional student loan forgiveness tax-free through 2025. This means that any federal student debt forgiven under current programs wouldn’t come with a (potentially hefty) tax bill.

For example, if you’re pursuing federal loan relief via programs like Teacher Loan Forgiveness, or even through income-driven repayment plans, you wouldn’t face a higher tax bill upon seeing your remaining balance canceled. (Loans canceled through the Public Service Loan Forgiveness were already untaxed.)

The same would be true if you’re repaying private or institutional student loans with the help of non-federal repayment assistance programs.

The Democratic senators who introduced the provision to the relief package estimated that borrowers with $50,000 in income would save about $2,200 in taxes for every $10,000 in forgiven student loan debt.

But what about student loan forgiveness?

On the other hand, the rescue program doesn’t include any outright forgiveness of student loans, even as some senators have been pushing the White House to issue an order forgiving $50,000 in federal loans per borrower.

So far, the administration has only said it’s reviewing its legal authority to discharge $10,000 via executive order.

Some experts caution that the move to make student debt forgiveness tax-free, at least for the near term, doesn’t necessarily make it more likely that the U.S. government will grant mass forgiveness for its educational loans.

But while the new economic rescue plan doesn’t offer forgiveness, it does have some other provisions meant to help pay for higher education.

Specifically, it includes $91 million to spend on communications with federal student loan borrowers, something which could be critical in the months before the current repayment freeze expires on Oct. 1.

It also features $40 billion for colleges and universities, with at least half of funds pegged for emergency grants to help students stay enrolled, according to Inside Higher Education.


Published in News & Policy