The American Rescue Plan Made Student Loan Forgiveness a Lot Less “Taxing”

If you’ve had your student loans forgiven, congratulations! And if you’ve gotten your student loans forgiven since the start of 2021, extra congratulations! As part of the $1.9 trillion federal stimulus package that Joe Biden signed into law in March 2021, Americans don’t have to pay taxes on student loans forgiven from 2021 to 2025.

That provision came as a welcome change for activists pushing for student-loan relief. “We applaud lawmakers for including this measure for student loan borrowers in President Biden’s rescue plan,” Ashley Harrington, federal advocacy director and senior counsel at the Center for Responsible Lending, an organization that works to ensure a fair financial marketplace for borrowers.

U.S. senators Elizabeth Warren (D-Mass.) and Bob Menendez (D-N.J.) got the ball rolling earlier that month when they introduced S496, the Student Loan Tax Relief Act, which was then incorporated into H.R. 1319, the American Rescue Plan Act of 2021.

Section 9675 of that act “modifies the tax treatment of income attributable to the forgiveness of certain student loan indebtedness incurred between 2021 and 2026,” as the U.S. Congress’s summary explains. “It excludes from student gross income, for income tax purposes, income from the discharge of student loans for postsecondary education expenses, private education loans, and loans from certain tax-exempt educational organizations.”

In a press release about the passage of that act, Warren and Menendez noted that the provision “exclude[s] from income any student loan debt that is modified or discharged beginning December 31, 2020, until January 1, 2026, including private and institutional loans.” (CNBC reports that the provision might be extended past that 2026 deadline and might even become permanent.)

The senators also said that the average student borrower who earns $50,000 in income would save around $2,200 in taxes for every $10,000 of forgiven student loans because of the changeover.

Warren and Menendez also stated that the provision “paves the way” for Biden to cancel at least $50,000 in federal student loan debt, a cause behind which senators and activists alike have rallied recently. In Feb. 2021, Chuck Schumer (D-N.Y.) and Ayanna Pressley (D-Mass.) joined Warren in reintroducing a resolution calling for Biden to leverage the Higher Education Act to strike up to $50,000 in student loan debt for federal student loan borrowers.

And in Warren and Menendez’s press release, Harrington noted that the American Rescue Plan Act’s provision on student-loan forgiveness “will pave the way for President Biden to provide real relief to student borrowers without fearing they’ll receive a huge tax bill they cannot afford. This especially benefits low-income borrowers and borrowers of color who are disproportionately burdened by student debt and the negative impacts of the current health and economic crisis.”

Harrington added, “With this obstacle removed, President Biden should turn toward providing across-the-board student debt cancellation of $50K per borrower. By doing so, he would wipe out the debt of 75 percent of federal student loan borrowers and provide a desperately needed economic boost that will benefit everyone.”