Student loan forgiveness has been a hot topic during debates on the recent stimulus bill. Some members of the Senate argue that paying exorbitant student loans is a difficult burden when people are struggling due to the pandemic. Others counter that if students made the debt, they should pay it.
This article covers how the stimulus affects student loan forgiveness and what you can expect in the future.
How Student Loans Were Included in Recent Stimulus Packages
The U.S. Congress has passed three economic stimulus packages to address the effects of the coronavirus pandemic. In March 2020, the Trump administration signed the CARES Act into law. It halted payments and interest accrued on some federal student loans, but these provisions did not cover most private student loans.
In December 2020, the Trump administration passed another relief bill. This one included an incentive for employers to pay their employees’ student loans.
A year later, in March 2021, the Biden administration passed the American Rescue Plan. It extended the suspension of loan payments to Sept. 30, 2021, and later to Jan. 31, 2022. The interest rate on federal student loans is 0% during this period.
This new plan doesn’t cancel student loan debt. Instead, it specifies that from 2021 to 2025, borrowers who are already in forgiveness programs won’t have to report the forgiven debt as income and pay taxes on it.
How Does the Stimulus Plan Affect Student Loan Forgiveness?
Recent updates to the student loan forgiveness plan extend its benefits to more borrowers. In August 2021, the U.S. Department of Education announced loan discharges for more than 323,000 borrowers who have a total or permanent disability. They will identify borrowers for the $5.8 billion program with data from the Social Security Administration (SSA). Borrowers with a total and permanent disability will no longer have to complete an application to have their loans discharged.
The U.S. Department of Education is extending indefinitely a program announced in March to reinstate loan discharges that had been rescinded. Under the old rules, a borrower with a total and permanent disability was eligible for a student loan discharge, but they had to submit earnings documentation annually for three years. If they failed to do so, their loans would be reinstated.
Under the new rules, borrowers aren’t required to submit earnings documentation. In addition, 41,000 borrowers whose loans were reinstated due to not filing paperwork will get their discharges back.
In a separate announcement, the Department expanded the criteria for the pause in student loan payments. Initially, the student loan forgiveness and interest waiver program didn’t extend to borrowers in the Federal Family Education Loan Program (FFELP) whose loans were in default. That is because the program only covered loans owned by the U.S. Department of Education. Default loans were held by other agencies.
The U.S. Department of Education is making more than 1 million of those borrowers eligible for the program. Borrowers who defaulted on FFEL loans during the pandemic will have them returned to good standing and the defaults removed from their credit reports.
Student Loan Forgiveness Will Be Tax-Free
Understanding who benefits from the tax rules regarding the student loan forgiveness program requires knowledge of how a student loan is forgiven. Borrowers who want to reduce their loan payments can apply for an income-driven repayment plan.
Most federal Direct loans are eligible for income-driven repayment plans. These are designed to be affordable based on a borrower’s income and family size. There are four types of plans that cap your monthly payment at a percentage of your income. Generally, that amount is 10% of your discretionary income. These student loan repayment plans typically have 20- or 25-year terms. After that period, any remaining balance is forgiven.
Previously, that balance was taxed as income. For example, if a person’s remaining balance was $100,000 after 20 years, that amount would be forgiven. However, the IRS would count that $100,000 as income. That would create a crushing tax bill for the borrower.
Another type of loan forgiveness program is Public Service Loan Forgiveness (PSLF). Through this program, individuals who work in a public sector job can have their federal Direct loans forgiven after 120 qualifying monthly payments. To qualify, you must be employed by a federal, state, or local government, tribal government, or not-for-profit organization.
There is also a student loan program for teachers that forgives a specified amount after five years. Through the Teacher Loan Forgiveness Program, certified teachers who work for five years in a low-income school may be eligible for up to $17,500 in loan forgiveness. The program covers subsidized and unsubsidized Direct Loans or Federal Stafford Loans.
Tax-free loan forgiveness helps borrowers who complete the required payments by Dec. 31, 2025.
Everything in the Stimulus Package That Impacts Student Loans
Here’s a list of the provisions in the stimulus packages that might help student loan borrowers:
- Loan payments are suspended through Jan. 31, 2022.
- No interest will accrue until Jan. 31, 2022.
- Suspended payments count toward loan forgiveness programs.
- No taxes are due when student loans are forgiven through Dec. 31, 2025.
- Employers can pay up to $5,250 per year toward an employee’s student debt. The contribution will not be included in the employee’s taxable income. This benefit is in effect until 2025.
- For borrowers who are in default, the months of suspended payments count toward the nine-month period needed for loan rehabilitation.
- There will be no collection actions or wage garnishments for unpaid student loans.
Private Loans Aren’t Included
The moratorium on student loan payments applies only to student loans held by the federal government. Private loans held by banks, credit unions, and other private institutions aren’t included. However, some private lenders have chosen to offer forbearance programs. These allow you to pause payments for a period of time. Although the payments will pause, interest on the loan will still accrue. Check with your loan servicer to see which type of forbearance plan they offer.
Is Further Student Loan Forgiveness Possible?
So far, the Biden administration has implemented student loan forgiveness programs for specific groups of students. These include:
- Student loans held by 323,000 disabled borrowers: More than $5.8 billion in student loans will be discharged for people with total and permanent disabilities.
- Loans for nearly 200,000 students defrauded by schools that used deceptive practices: Student debt was wiped away for students of the former American Career Institute, ITT Technical Institute, Corinthian College, and Court Reporting Institute, to name a few.
- 22,000 borrowers working in public service jobs will see their debt wiped out through a revamp of the Public Service Loan Forgiveness Program (PSLF): This will happen automatically without any action from the borrowers. Another 27,000 public service workers might be eligible if they certify additional periods of employment.
There has been no announcement of a blanket student loan forgiveness program to benefit all borrowers. However, Democratic Majority Leader Chuck Schumer and Sen. Elizabeth Warren have pushed President Joe Biden to use an executive order to cancel up to $50,000 in debt for federal student loan borrowers.
Biden has indicated a willingness to write off $10,000 but says he doesn’t believe the White House has the legal authority to cancel the debt by executive order. The U.S. Department of Education and the Justice Department are reviewing whether the executive branch has the authority to do so or if Congress must act.
Learn More About Student Loan Debt Relief on CollegeFinance.com
While the payment and interest pause benefits most student loan holders, student debt forgiveness is not feasible for most borrowers. Most student loan cancellation programs are targeted to borrowers with specific occupations or circumstances. Qualifying for other forgiveness programs requires 20 years or more of income-based payments, an option that is not always the most economical choice.
But one thing has been clear over the past year or so: Student loan relief is a constantly evolving topic. To follow the latest updates on student loan forgiveness, look to CollegeFinance.com. You’ll find news and resources about financial aid, student loans, and other financing options. Whether you’re a student, parent, or graduate, we have a variety of resources to help with college financial planning.