What the New Stimulus Bill Means for Student Loan Borrowers

Under the latest COVID-19 relief bill, student loan forgiveness is tax-free through 2025. However, the bill doesn’t cancel any student loan debt.

The most recent COVID-19 relief bill, officially called the American Rescue Plan Act of 2021, which President Joe Biden signed into law on March 11, 2021, includes, among other things:

It also includes a provision exempting all student loan forgiveness after December 31, 2020, and before January 1, 2026, from federal taxation. (See § 9675).

Student Loan Forgiveness, Usually Taxable, Is Tax-Free Under the Relief Bill

Federal laws generally treat any forgiven student loan debt as a taxable event for the borrower, subject to a couple of exceptions, like for Public Service Loan Forgiveness, as well as disability discharges (until January 1, 2026). But in other cases, student loan forgiveness, like under an income-driven repayment plan, can result in a significant tax liability. Depending on your particular situation and how much debt was canceled, the taxable income could add hundreds or perhaps thousands of dollars onto your tax bill.

The American Rescue Plan Act makes student debt forgiveness tax-free until January 1, 2026. Significantly, the tax exemption under this law covers direct federal student loans, Federal Family Education Loans (FFELs), and private student loans.

No New Student Loan Forgiveness Under the Law

The stimulus plan, however, doesn't cancel any student loan debt. But if the federal government forgives student loans between now and through 2025, the amount that's forgiven won't be treated as income for federal taxation purposes. The Biden administration has indicated that it will encourage Congress to pass separate student loan forgiveness legislation that includes $10,000 in loan forgiveness in the coming months.

You Might Still Have to Pay State Taxes After Loan Forgiveness

The stimulus bill doesn't address state taxes. Some states consider forgiven student loan debt as taxable income, even when the federal government doesn't.

Federal Student Loan Payment Suspension

Keep in mind that most federal student loan payments, interest, and collections are suspended until January 31, 2022. According to the U.S. Department of Education, suspended payments will count as qualifying payments for the purposes of student loan forgiveness programs, including Public Service Loan Forgiveness and income-driven repayment forgiveness.

Effective date: March 11, 2021