The United States Senate passed an amended version of the American Rescue Plan Act of 2021 on Saturday, March 6, 2021, with a vote of 50 to 49 along political lines. One of the amendments adds tax-free student loan waivers to the home version of the bill. The House is expected to approve the Senate version of the bill, and the president has said he will sign it into law.
The American Rescue Plan Act of 2021 includes a provision for federal and tax-free discharge [+]
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Section 9675 of the 628-page law changes the tax treatment of student loan waivers in 2021 through 2025.
The legislation excludes full or partial discharge of student loan debts from income, making it tax-free.
Eligible loans include:
- All federal student loans and federal mothers’ loans, including direct loans, FFEL program loans (whether held by the U.S. Department of Education or commercial lenders), federal Perkins loans, and federal consolidation loans
- All state education loan programs
- Institutional loans provided by a college or university
- Private Student Loans and Private Parent Loans
The loans must be provided, 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 educational loan providers. The loans must be made “explicitly for post-secondary education costs, whether provided through the educational institution or directly to the borrower.”
Most student loan waiver programs were already tax-free. Among which:
- Forgiveness for working in a particular profession, such as public service loan forgiveness, teacher loan forgiveness, certain physician and nurse loan forgiveness programs, and various Perkins federal loan forgiveness programs.
- Layoffs for death and disability on federal and private student loans
- Discharges in closed schools
- False Certification Discharges
- Unpaid Refunds
The main difference is that now the cancellation of the remaining debt after 20 or 25 years in an income-oriented repayment plan will be tax-free. Only borrowers with a means-tested repayment plan are eligible for remission before tax-exempt status expires by the end of 2025. This benefits several hundred thousand borrowers, the majority of whom have lived below the poverty line for decades.
President Biden’s proposal for $ 10,000 in student loan forgiveness qualifies for tax-free treatment.