President Joe Biden (Photo by Oliver Contreras-Pool/Getty Images)
The new stimulus bill implies this about student loan cancellation.
Here’s what you need to know.
Student Loans
The new stimulus bill, the American Rescue Plan Act, includes a section that makes student loan forgiveness tax-free. This has important financial implications for student loan borrowers who get student loan forgiveness through December 31, 2025 because they won’t owe any income tax on the amount of student loans forgiven. While the new stimulus bill doesn’t include any student loan cancellation, the stimulus bill foreshadows what could come next with wide-scale student loan forgiveness. Specifically, there are three implications for student loan cancellation:
1. Student loan cancellation may not happen immediately
The stimulus bill specifically provides for tax-free student loan forgiveness for a period of five years (from January 1, 2021 through December 31, 2025). If Congress plans to cancel student loans now on a one-time basis, it’s curious why there is a five-year period for tax-free student loan forgiveness. There are several ways to interpret this provision. First, it’s possible that Congress wants to be over-inclusive to account not only for wide-scale student loan cancellation now, but also for student loan forgiveness through income-driven repayment plans. With a longer time frame, this may encourage more borrowers who are struggling financially to enroll in an income-driven repayment plan for their federal student loans. Another possibility is that Congress may not pass student loan cancellation immediately, and may need additional time to finalize legislation. Therefore, Congress may want a longer time frame to ensure that student loan borrowers are protected if Congress passes student loan cancellation longer-term. A third possibility is that Congress plans not only one-time student loan cancellation, but also ongoing student loan cancellation as well within the five-year period.
2. Congress may cancel private student loans
This provision is somewhat surprising given current messaging, but Congress references that private education debt would be included in any tax-free student loan forgiveness. Currently, student loan forgiveness is only available for federal student loans. For example, income-driven repayment and the Public Service Loan Forgiveness program are two opportunities for borrowers to get student loan forgiveness. Further, Sen. Elizabeth Warren (D-MA) and Senate Majority Leader Chuck Schumer (D-NY) have proposed cancelling student loans up to $50,000 by executive order for borrowers who earn less than $125,000 annually. This proposal for student loan cancellation is intended for federal student loans only. That said, during their 2020 presidential campaigns, Warren and Sen. Bernie Sanders (I-VT) both proposed cancelling private student loans in addition to federal student loan debt. The reference to private student loan debt in the stimulus bill could mean that Congress is considering cancelling private student loans, which are not owned by the federal government, as well.
3. Congress may cancel FFELP student loans and Perkins Loans
This would come as a major relief for student loan borrowers who have FFELP student loans and Perkins Loans. In Section 9675 of the stimulus bill, the stimulus bill references ‘‘any loan provided expressly for post secondary educational expenses, regardless of whether provided through the educational institution or directly to the borrower, if such loan was made, insured, or guaranteed by…the United States, or an instrumentality or agency thereof.” Both FFELP Loans and Perkins Loans are federal loans. However, prior to 2010, FFELP loans were issued by financial institutions such as banks and guaranteed by the federal government. Some FFELP Loans are owned by the federal government, while others may be owned by lenders or private investors. Perkins Loans are also federal loans, and are issued by colleges and universities. The CARES Act — the $2.2 trillion stimulus package — excluded FFELP Loans and Perkins Loans not owned by the federal government, leaving millions of student loan borrowers without essential financial relief such as temporary student loan forbearance. By including FFELP Loans and Perkins Loans in the new stimulus bill, Congress is signaling to these student loan borrowers that they could be included in any future student loan cancellation.
Student Loans: Tax-free student loan forgiveness
The decision to make student forgiveness tax-free is a game-changer, and it will help many student loan borrowers save money. The tax-free student loan forgiveness plan in the stimulus bill was led by Warren, who has been the chief advocate for making student loan forgiveness tax-free. Progressives like this provision because it is a pathway for wide-scale student loan cancellation is truly “free and clear” for student loan borrowers. Moderates who don’t support student loan cancellation may like the tax-free plan because it will encourage more borrowers to get student loan forgiveness through an income-driven repayment plan. Despite the references to tax-free student loan forgiveness, so far, Congress has not included any wide-scale student loan cancellation in a stimulus package. There are still concerns about how much student loan forgiveness there will be and who will qualify. With the references of tax-free student loan forgiveness, this could be the first step in helping student loan borrowers get wide-scale student loan relief. However, there is no timeline for student loan cancellation referenced in the stimulus bill, or by members of Congress or the president. That’s why if you have student loans, make sure you understand all your options for student loan repayment. Here are some potential options:
