A small but important provision has been added to the $ 1.9 trillion stimulus package that just went through Congress – also known as the COVID-19 Relief Bill or the American rescue plan – which makes the student loan forgiveness federal tax free until 2025.
This provision can potentially save US student loan borrowers thousands of dollars in taxes if they receive full or partial forgiveness on their student loans. Here’s who can benefit from the provision and how much they can save.
Student loan cancellation becomes tax-free until 2025
Led by Democratic Senators Elizabeth Warren and Bob Menendez, the Student Loan Tax Relief Act was introduced on March 1, 2021, as a provision of the US bailout. The stimulus plan was adopted by Congress on March 10, 2021.
With this provision, borrowers whose student loans are canceled will no longer be responsible for paying taxes on the canceled amount from 2021 to 2025, said Curtis Campbell, president of TaxAct. “This means that instead of declaring the canceled student loan debt as income on their taxes, as is typically required, a person who has already taken out income-driven repayment plans and expects that these student loans be canceled, will not have to pay income tax. on this debt canceled for the next five years.
Prior to the stimulus package, any student loan debt that was written off by income-based repayment plans was considered taxable, leaving borrowers with a big bill even after seeing their debts wiped out.
Borrowers with income-based repayment plans will benefit the most
Loans eligible for tax exemption include all federal student loans, federal parent loans, state education loan programs, college or university loans, private student loans and private loans to parents. While some forms of student loan release are already tax-free, this move benefits borrowers seeking a discount through an income-based repayment plan, who were previously subject to tax.
Stacey MacPhetres, Senior Director of Education Funding at Bright Horizons EdAssist Solutions, points out that the remittance history under current income-oriented programs is low and borrowers will still have to pay the 20 or 25 years. payments to be eligible for a tax-free rebate by January 1, 2026. However, for those who qualify, this provision has the potential to save borrowers thousands of dollars during tax season.
Joe DePaulo, CEO and co-founder of College Ave, agrees on the financial benefits: “There is no doubt that the pandemic has had a financial impact on many families. The recent adoption of the tax-free student loan exemption may help families facing financial difficulties. “
Stimulus package paves way for student loan cancellation
Progressive Democrats like Warren and Menendez are putting increased pressure on President Biden to pass an executive order to cancel student loan debt. Congressional Democrats lobbied for Biden to cancel $ 50,000 in student loans per borrower, but the president prefers a much lower amount of $ 10,000 instead.
While the provision of the stimulus bill does not include any direct loan rebates, it leaves Progressive Democrats hoping it will push President Biden in the leadership of massive student loan cancellation, since the measures will no longer have tax implications for borrowers.