March 6, 2021

Stimulus Bill Suggests This About Student Loan Cancellation

Stimulus Bill Suggests This About Student Loan Cancellation

The new stimulus bill implies this about student loan cancellation.

Here’s what you need to know.

Student Loans

The new stimulus bill, the American Rescue Plan Act, includes a section that makes student loan forgiveness tax-free. This has important financial implications for student loan borrowers who get student loan forgiveness through December 31, 2025 because they won’t owe any income tax on the amount of student loans forgiven. While the new stimulus bill doesn’t include any student loan cancellation, the stimulus bill foreshadows what could come next with wide-scale student loan forgiveness. Specifically, there are three implications for student loan cancellation:

1. Student loan cancellation may not happen immediately

The stimulus bill specifically provides for tax-free student loan forgiveness for a period of five years (from January 1, 2021 through December 31, 2025). If Congress plans to cancel student loans now on a one-time basis, it’s curious why there is a five-year period for tax-free student loan forgiveness. There are several ways to interpret this provision. First, it’s possible that Congress wants to be over-inclusive to account not only for wide-scale student loan cancellation now, but also for student loan forgiveness through income-driven repayment plans. With a longer time frame, this may encourage more borrowers who are struggling financially to enroll in an income-driven repayment plan for their federal student loans. Another possibility is that Congress may not pass student loan cancellation immediately, and may need additional time to finalize legislation. Therefore, Congress may want a longer time frame to ensure that student loan borrowers are protected if Congress passes student loan cancellation longer-term. A third possibility is that Congress plans not only one-time student loan cancellation, but also ongoing student loan cancellation as well within the five-year period.

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