Covid-19 relief bill succeeds with tax-free forgiveness for student loans

The U.S. Senate passed an amended version of the 2021 U.S. Rescue Plan Act on Saturday, March 6, 2021 by a vote of 50 to 49 along political lines. One of the amendments adds tax-free student loan forgiveness to the House 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 under the law.

Section 9675 of the 628 pages of legislation changes the tax treatment of forgiveness for student loans in 2021 through 2025.

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

Qualifying loans include:

• All federal student loans and federal parent 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 public education loan programs
• Institutional loans taken out by a college or university
• Private student loans and private parent loans

The loans must be made, secured or guaranteed by the federal government, including federal agencies, such as the U.S. Department of Education, state governments, colleges and universities, and lenders for private loans. The loans had to be “expressly made for post-secondary expenses, whether provided by the educational institution or directly to the borrower.”

Most student loan forgiveness programs have been tax-free. These include:

• Forgiveness for the work in a particular profession, such as forgiveness for public service loan, forgiveness for teachers, certain forgiveness programs for doctors and nurses, and various forgiveness programs for federal Perkins loans.
• Death and disability exemptions on federal and private student loans
• Closed school outings
• False certification dismissed
• Unpaid refunds

The biggest difference is that the waiver of the remaining debt after 20 or 25 years in an income-driven repayment plan will be tax-free. Only borrowers who have income-conditional repayment plans can get forgiveness before the tax-free status expires at the end of 2025. This will benefit a few hundred thousand borrowers, the majority of whom have been living below the poverty line for decades.

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