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Financial Planning > College Planning > Student Loan Debt

How the $1.9T Stimulus Package Benefits College Students

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What You Need to Know

  • The American Rescue Plan makes federal student loan forgiveness tax-free.
  • It provides tens of billions of dollars for emergency financial aid to be dispensed by colleges.
  • The relief package adds protections for military veterans attending for-profit colleges.

The $1.9 trillion relief package just signed into law by President Joe Biden provides several provisions that benefit both college student loan borrowers and non-borrowers and may pave the way for broad-based student loan forgiveness in the future.

Tax-Free Student Loan Forgiveness

Currently, federal student loan borrowers can enroll in programs that allow forgiveness after 20 or 25 years of on-time payments, but they have to pay taxes on the amount that is ultimately forgiven. The American Rescue Plan changes that. Federal student loan debt forgiven between Jan. 1, 2021 and Dec. 31, 2025 will be exempt from federal taxes.

This benefit primarily affects borrowers enrolled in the Income Contingent Repayment (ICR) plan, which started in 1993 and requires 25 years of repayment to qualify for forgiveness. It does not apply to other federal student loan repayment plans, which require 20 or 25 years of repayment but started much later. 

Enrollees in the ICR plan, however, may be able to switch into the Revised Pay-as-You Earn repayment plan (REPAYE) to qualify for 20-year loan forgiveness and receive the tax-free benefit earlier, according to college financial aid expert Mark Kantrowitz.

He expects this provision in the economic stimulus plan will be extended beyond its expiration date and may even be made permanent, which would apply to other federal student loan forgiveness plans and provide tax-free loan forgiveness for many more borrowers. Kantrowitz said the next budget reconciliation could include forgiveness of federal student loans but it will depend on White House priorities.  

Emergency Financial Aid 

The relief package provides $39.6 billion to colleges and requires that at least half of the funds that institutions receive be spent on emergency financial aid.

Such aid would apply to anything related to the cost of college attendance, including tuition and room and board, Kantrowitz said. Colleges still need to wait for their allocations to know how much money will be available to students.

Protections for Student Veterans Attending For-Profit Colleges

Under current law, for-profit colleges can’t receive more than 90% of their revenue from federal financial aid sources, but funds provided under the GI Bill and Department of Defense Tuition Assistance program are exempt from the 90% cap. That allowed for-profit colleges using predatory lending practices to exploit military veterans with promises of a good education and better jobs while charging extremely high interest rates. The economic relief closes that gap, with a delay.

Nearly a third of GI Bill tuition benefits went to for-profit schools in 2017, according to the Government Accountability Office.

This provision of the relief law won’t take effect for two years following a compromise with Republican senators, one of whom — Rick Scott of Florida — tried to strip the provision from the stimulus package.

Getting Borrowers Back Into Repayment

The relief package includes $91 million for the Education Department to help prepare federal student loan borrowers to resume repayment after the moratorium on federal student loan payments ends Sept. 30.

The funds will provide “significant direct outreach and support efforts for the tens of millions of affected student loan borrowers,” said Jessica Thompson, associate vice president at The  Institute for College Access & Success (TICAS).

Stimulus Check Eligibility for Dependent College Students 

Unlike previous economic relief packages, the American Rescue Plan allows college students who are claimed as dependents on a parent’s tax returns to qualify for the $1,400 stimulus check. The check, however, will be sent to their parents, who can use the money as they see fit, which could include helping to pay for college.

Couples with an adjusted gross income of $150,000 or less qualify for the full stimulus payments.

Relief for Small-Business Owners With Defaulted Student Loans

Small-business owners who have defaulted on federal student loans or are delinquent in their payments can now qualify for loans from the Paycheck Protection Program, which received $7.25 billion in additional funding.

(Image: Shutterstock)


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