Senate Passes Stimulus Bill With Student Loan Tax Relief — Will It “Pave The Way” To Cancel Student Debt?

WASHINGTON, DC – MARCH 01: Sen. Elizabeth Warren (D-MA) holds a news conference to announce … [+]

The Senate on Saturday approved President Biden’s signature $1.9 trillion stimulus package, including student loan tax relief that advocates say is a critical first step to cancelling student debt.

The package’s biggest provisions include $1,400 direct payments for taxpayers earnings less than $75,000 per year, extended federal unemployment benefits of $300 per week through September, $170 billion to reopen schools, $100 billion to expand vaccine distribution, and an expanded child tax credit that could provide up to $3,600 per child per year in financial support.

A small tax provision could have a significant benefit for student loan borrowers. The legislation exempts all student loan forgiveness from taxation through January 1, 2026. The exemption is broad, covering government-held federal student loans, federally-guaranteed FFEL-program student loans, and private student loans.

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Cancellation of debt, including student loan debt, is often a taxable event for the borrower. Congress has carved out some exceptions, such as for Public Service Loan Forgiveness and disability discharges. But in other cases, cancelling debt can leave the borrower with a significant (and sometimes unaffordable) tax liability, blunting the financial benefits.

It had been unclear whether the student loan tax relief provision would survive the Senate’s chaotic vote-a-rama session, where any senator could offer amendments to the package and force up-or-down votes. With the barest of majorities, Senate Democrats had to remain united for most of the legislation to remain intact. But for the most part, they did, and the student loan tax relief provision made it into the final bill.

Senators Elizabeth Warren (D-MA) and Bob Menendez (D-NJ), who had supported the student loan tax provision, praised its inclusion in the final stimulus package.

“I’m happy that my bill with Senator Menendez to make any student loan forgiveness tax-free was included in the COVID relief bill,” said Senator Warren in a Tweet. “This clears the way for President Biden to #CancelStudentDebt without burdening student borrowers with thousands of dollars in unexpected taxes.”

“I’m hopeful this will pave the way for President Biden to provide real debt relief so many student borrowers need, and give a boost to our economy that benefits everyone,” said Senator Menendez in a statement.

“Student loan borrowers desperately need relief — but in addition to reducing the amount borrowers owe, we’ve also got to make sure that we aren’t saddling them with an unexpected tax bill if their loans are forgiven,” said Sen. Patty Murray (D-WA) who also supported the provision. “Student loan forgiveness should be tax-free — full stop — and that’s what the American Rescue Plan accomplishes.”

The bill now heads back to the House for a final vote, which could come as soon as Tuesday. President Biden is expected to sign the bill into law within a week.

Student loan borrower advocates and progressive lawmakers have been lobbying the Biden administration to enact broad student debt cancellation through executive action. Biden has indicated that he would prefer that Congress enact student loan relief, including some level of student loan forgiveness for borrowers. Biden has supported $10,000 in student loan forgiveness, but recently came out against $50,000 in student loan forgiveness proposed by Democratic lawmakers and progressive activists.

In the meantime, Biden has extended the current pause on most federal student loan payments, interest, and collections to September 30, 2021. And he has directed the Justice Department to review the legality of cancelling student debt through executive action.

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Adam S. Minsky is an advocate, innovator, and entrepreneur who established a unique law practice devoted entirely to assisting student loan borrowers and their families.

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