Covid-19 Relief Bill Passes With Tax-Free Student Loan Forgiveness

The U.S. 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 amendments adds tax-free student loan forgiveness to the House version of the bill. The House is expected to pass the Senate version of the bill and the President has said that he will sign it into law.

The American Rescue Plan Act of 2021 includes a provision for tax-free discharge of federal and … [+]

Section 9675 of the 628-page legislation changes the tax treatment of student loan forgiveness in 2021 through 2025, inclusive.

The legislation excludes from income the full or partial discharge of student loan debt, making it tax-free.

Eligible loans include:

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The loans must have been made, insured or guaranteed by the federal government, including federal agencies, such as the U.S. Department of Education, State governments, colleges and universities, and private education loan lenders. The loans must have been made “expressly for postsecondary educational expenses, regardless of whether provided through the educational institution or directly to the borrower.”

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

The main difference is that now the forgiveness of the remaining debt after 20 or 25 years in an income-driven repayment plan will be tax-free. Only borrowers in income-contingent repayment plans will qualify for forgiveness before the tax-free status expires at the end of 2025. This will benefit several hundred thousand borrowers, the majority of whom have been living under the poverty line for decades.

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

I am Publisher of PrivateStudentLoans.guru, a free web site about borrowing to pay for college. I am an expert on student financial aid, the FAFSA, scholarships, 529

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