Covid-19 Emergency Relief Bill Goes With Tax Free Status For Student Loan Forgiveness

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The U.S. Senate passed a revised version of the U.S. Rescue Plan Act of 2021 on Saturday, March 6, 2021, by 50 votes to 49 for political reasons. One of the amendments adds to the House of Representatives bill the forgiveness of tax-free student loans. The House of Representatives is expected to pass the Senate version of the bill, and the president said he would sign it into law.

Section 9675 of the Act, 628 pages, changes the tax regime for forgiving student loans from 2021 to 2025 inclusive.

The legislation excludes from income the full or partial repayment of student loan debt, which makes it tax-free.

Eligible loans include:

  • All federal student loans and federal parental loans, including direct loans, FFEL loans (whether owned by the U.S. Department of Education or commercial lenders), Perkins federal loans, and federal consolidation loans
  • All state educational credit programs
  • Institutional loans from a college or university
  • Private student loans and private parent loans

Loans must be provided, insured, or guaranteed by the federal government, including federal agencies such as the US Department of Education, state governments, colleges and universities, and private education loan lenders. Loans must be made “specifically to cover the cost of higher education, whether made through an educational institution or directly to the borrower.”

Most student loan forgiveness programs were no longer taxed… This includes:

  • Forgiveness for employment in a specific profession, such as government service loan forgiveness, teacher loan forgiveness, specific loan forgiveness programs for doctors and nurses, and several federal Perkins loan forgiveness programs.
  • Extracts with death and disability for federal and private student loans
  • Closed school dropouts
  • False certificate dumps
  • Unpaid chargebacks

The main difference is that now the forgiveness of the remaining debt after 20 or 25 years under the income-driven repayment plan will not be taxed. Only borrowers with income-driven repayment plans will be eligible for forgiveness until the expiration of the tax-exempt status at the end of 2025. This will benefit several hundred thousand borrowers, most of whom have lived below the poverty line for decades.

President Biden’s proposal to forgive a $ 10,000 student loan would be eligible for tax-free treatment.

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