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March 12, 2021 at 04:37 PM
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.
