Biden Stimulus Program Makes Student Loan Forgiveness Tax Free

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A small but important provision has been added to the $ 1.9 trillion stimulus package that just went through Congress – also known as the COVID-19 Relief Bill or American Rescue Plan – that makes student loan forgiveness exempt from federal tax until 2025.

This provision has the potential to save US borrowers thousands of dollars in taxes if they receive full or partial forgiveness on their student loans. Here is who can benefit from this provision and how much they can save.

Student loan forgiveness becomes tax-free until 2025

Led by Democratic Senators Elizabeth Warren and Bob Menendez, the Student Loan Tax Relief Act was introduced on March 1, 2021 as part of the US bailout. The stimulus plan was adopted by Congress on March 10, 2021.

With this provision, borrowers whose student loans are canceled will no longer be responsible for paying taxes on the canceled amount from 2021 to 2025, said Curtis Campbell, president of TaxAct. “This means that instead of reporting the canceled student loan debt as income on their taxes, as is typically required, a person who has already taken out income-tested repayment plans and expects that these student loans be canceled, will not have to pay income tax. on this canceled debt for the next five years. “

Prior to the Stimulus Package, any student loan debt that was written off through income-focused repayment plans was considered taxable, leaving borrowers with a big bill even after seeing their debt written off.

Borrowers with income-based repayment plans will benefit the most

Loans that are eligible for the tax-free remission include all federal student loans, federal parent loans, state student loan programs, college or university loans, loans private student and private parent loans. While some forms of student loan release are already tax-free, this measure benefits borrowers seeking forgiveness through an income-driven repayment plan, who were previously subject to tax.

Stacey MacPhetres, Senior Director of Education Funding at Bright Horizons EdAssist Solutions, points out that the history of forgiveness under current income-focused programs is low and borrowers will still have to pay the 20-25 years. payments to be eligible for a tax-free rebate by January 1, 2026. However, for those who qualify, this provision could save borrowers thousands of dollars in tax season.

Joe DePaulo, CEO and co-founder of College Ave, agrees on the financial benefits: “There is no doubt that the pandemic has had a financial impact on many families. The recent shift from student loan forgiveness to tax exemption may help families facing financial difficulties. “

Stimulus package sets the stage for student loan cancellation

Progressive Democrats like Warren and Menendez are putting increased pressure on President Biden to pass an executive order canceling student loan debt. Democrats in Congress have been pushing for Biden to write off $ 50,000 in student loans per borrower, but the president is instead in favor of a much lower amount of $ 10,000.

While the provision of the stimulus bill does not include any direct loan cancellations, it gives hope to Progressive Democrats that this will push President Biden in the direction of a massive student loan cancellation, as any action will no longer be tax implications for borrowers.

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