The Covid-19 relief bill passes with the waiver of the tax-free student loan

The US Senate passed an amended version of the American Rescue Plan Act of 2021 on Saturday, March 6, 2021, by a vote of 50 to 49 along political lines. One of the changes adds the forgiveness of the tax-free student loan to the version of the House bill. The Chamber must approve the version of the bill in the Senate and the president said he will make it into law.

Section 9675 of the 628-page legislation alters the tax treatment of student loan forgiveness from 2021 to 2025, inclusive.

The legislation excludes from the revenue the total or partial cancellation of the student loan debt, making it exempt from taxes.

Eligible loans include:

• All federal student loans and federal parent loans, including direct loans, FFEL loans (whether maintained by the U.S. Department of Education or commercial creditors), Perkins federal loans and federal consolidation loans
• All state education loan programs
• Institutional loans made by a college or university
• Loans for private students and loans for private parents

The loans must have been made, insured or guaranteed by the federal government, including federal agencies such as the United States Department of Education, state governments, colleges and universities and private education loan lenders. The loans must have been made “expressly for post-secondary education expenses, regardless of whether they are provided through the educational institution or directly to the borrower”.

Most student loan forgiveness programs were already tax exempt. These include:

• Forgiveness for working in a specific occupation, such as Loan Forgiveness for Public Services, Forgiveness of Loans for Teachers, certain loan forgiveness programs for doctors and nurses and various forgiveness programs for Perkins Federal Loans.
• Discharges due to death and disability in federal and private student loans
• Closed high school
• False certification discharges
• Unpaid refund discharges

The main difference is that now debt forgiveness remaining after 20 or 25 years on an income-based repayment plan will be tax-free. Only borrowers on income contingency repayment plans will be entitled to forgiveness before the tax-exempt status expires in late 2025. This will benefit several hundred thousand borrowers, most of whom have lived below the poverty line for decades. .

President Biden’s $ 10,000 student loan forgiveness proposal will qualify for tax-free treatment.