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2021 Update: Elimination of Taxes on Forgiveness till 2026

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In his first days of presidency, Joe Biden worked on a $1.9 trillion worth economic stimulus package. The package involved the allocation of funds for vaccine tests and distribution, schools, etc. The stimulus’s main advantage was $1,400 worth of a direct payment to U.S adults earning less than $75,000 yearly. Besides, weekly $300 unemployment benefits and $3,600 child tax credits were among the provisions. Luckily, at the beginning of March, the Senate approved the stimulus package. It created excitement among student loan borrowers for two reasons; first, the borrowers receive direct payment, which they can use for debt payments. Second, the stimulus package involves tax relief on student loan forgiveness. 

According to legislation, all forgiveness programs are free from taxes till 2026. Moreover, federal loans, including FFEL and private student loans, will qualify for this benefit. The provision could be made into the final bill. Currently, the House will have a final vote, and only then the president Biden can sign the provision into law. 

What was the Situation Before?

Forgiveness programs are designed to assist borrowers. Such options allow borrowers to eliminate the debt fully or partially. However, many forgiveness programs are taxable. It means the borrower needs to pay additional income taxes for the eliminated debt. 

Considering the aim of the forgiveness program, taxing it does not make any sense. While borrowers finally achieved to eliminate the debt, they found themselves in new payment obligation -taxes. Taxes can also generate interest and fees if not paid on time. 

For better understanding, imagine getting $50,000 forgiveness. If the tax rate is 24%, you will pay $12,000 unexpected taxes. 

Except for Public Service Loan Forgiveness and some other discharge options, almost all federal aid programs for student loan borrowers were subject to taxes. Fortunately, from now on, all forgiveness programs do not carry tax liability till 2026. 

Who Supported the Idea?

Sen. Elizabeth Warren and Bob Menendez were among the most influential names involved in the tax relief provision. Warren expressed her happiness for getting the tax-free forgiveness option included in the relief bill called “American Rescue Plan.” She even mentioned in her tweet that this bill would be an excellent beginning for the student loan cancellation option in the future.

Meanwhile, Sen. Menendez also supported this idea and mentioned that tax-relief hopefully would pave the way toward debt relief. Additionally, Sen. Murray was among the supporters. She noted that the government should not saddle the borrowers with unexpected tax while bringing benefits through forgiveness.

What Will Happen Next?

The bill should pass the House’s final vote, which is expected to finalize in a few days. After this process, president Biden will sign the bill. As a result, the tax-relief provision will be put into law, and tax-relief on all forgiveness programs will be applied till 2026.

What about Direct Forgiveness?

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Since Biden’s presidency, the focus shifted on direct student loan forgiveness claims. Back in March 2020, Biden indicated his support on $10,000 worth of loan forgiveness for student loan borrowers. After this claim, many Democrats pressured him to increase this amount to $50,000 student loan forgiveness per borrower. 

While developing the stimulus package, many were excited if Biden will include such forgiveness provisions into the relief plan. However, there was not any. Besides, many politicians urged Biden to deliver forgiveness with executive action. It means Biden did not need to wait for the approval of Congress. 

Previously, Biden expressed that he wants forgiveness to be in a legislative way with the Congres’ approval, and he does not support accepting a bill with executive action. Besides, in CNN town hall, Biden mentioned that $50,000 forgiveness is not fair. He indicated his opposition to this idea by noting that such massive forgiveness will mostly benefit higher-income graduates and bring disproportional effects. Additionally, this action could be a barrier to other goals like providing free community college because of its enormous costs.

Meanwhile, he still supported the $10,000 forgiveness per borrower. He said that the government could bring subsequent benefits like annual interest cap, etc., in the future. Besides, Biden extended the forbearance period till September 2021.

What else You Can Expect?

As mentioned, on his first day of presidency, Biden extended the forbearance period by eight months. At that time, many expected up to a 4-month extension, but Biden exceeded the expectations. 

Another expectation is on direct forgiveness, which we discussed previously. Hopefully, Biden will deliver $10,000 forgiveness with Congress’s approval.

Public Service Loan Forgiveness

Yet, there can be more changes. Biden, in his “Plan for Education Beyond High-School,” noted several adjustments. First, he mentioned that simplifying the Public Service Loan Forgiveness process is necessary. 

Public servants do hard work for the country, so they deserve better opportunities. Therefore, he noted that the new Public Service Loan Forgiveness program would bring $10,000 loan forgiveness per service year. Borrowers will be able to benefit from this program up to 5 times. Hence, the maximum benefit amount will be $50,000. 

Borrower’s Defense to Repayment

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Borrower’s Defense rule was also added to this plan. The program aims to eliminate the debt of borrowers who faced fraudulent activities by the school. If the school officials engaged in false advertising or lied about true education costs, Borrower’s Defense allowed debtors not to pay the debt. 

During the presidency of Trump, the Education Department Secretary Betsy DeVos opposed the Borrower’s Defense to Repayment program and mentioned that it is a source of “free money.” Hence, the review process was delayed, and many applicants received rejections. Luckily, Biden wants to bring this loan forgiveness program to its glorious days. Hopefully, in the future, more people who were misled by schools will receive this benefit.