Tax-Free Student Loan Forgiveness Provision Included In Stimulus Package

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Tax-Free Student Loan Forgiveness Provision Included In Stimulus Package

The American Rescue Plan Act of 2021 was signed into law on March 11, 2021. The historic $1.9 trillion stimulus package includes a litany of relief measures across a broad spectrum of economic issues. 

While the bill doesn’t include widespread student loan forgiveness, it paves the way for a tax-free treatment of forgiveness in the near-term. Section 9675 of the bill includes a provision to make any student loan forgiveness passed between December 31, 2020 and January 1, 2026 tax-free. 

Who Does This Affect Today?

Borrowers that are currently on income-driven repayment (IDR) plans that will finish their loan term between now and January 1, 2026 will have $0 tax liability on the outstanding balance of the loan at the end of their term.

Typically, IDR plans are capped at a percentage of a borrower’s income. At the end of the term, the remaining balance is forgiven. However, the forgiven amount is treated as taxable income in that year. As such, the borrower could face a hefty “tax bomb” for the year in which their remaining balance is forgiven.

With the new provision, borrowers on IDR plans will enjoy tax-free forgiveness at the duration of their term. Currently, this only applies through January 1, 2026.

Relief Beyond Income-Driven Repayment Plans

While the provision directly affects borrowers in the final years of their IDR plan, it could pave the way for other forms of forgiveness such as via Executive Action. 

Some lawmakers have pushed Biden to forgive $50,000 per borrower through Executive Action. Though, Biden clarified his stance a few weeks ago by saying, “I am prepared to write off the $10,000 debt but not $50 [thousand], because I don’t think I have the authority to do it.” If Biden were to issue $10,000 of forgiveness via Executive Order, it would come at zero tax liability to the borrower under the new constructs of the bill.

What Actions Can You Take?

If you are already on an IDR plan in the final few years of your term, congratulations! Historically, you may have faced a tax bill on the forgiven balance but now you can get a head start on tackling other debt or building wealth!

If you are on an IDR plan but your repayment term extends beyond January 1, 2026, unfortunately you won’t realize the tax-free implications of this bill. However, it’s possible that the legislation could be extended (similar to how Federal student loan payment suspension has been extended 3 times in the last year).

If you’d like to see how much you could save on an IDR plan, check out FutureFuel.io’s free tool called Reassess. In a matter of minutes, you can find every eligible IDR plan with personalized savings to your situation. The average borrower saves between $260 – $320 per month!

Payment Suspension Impact

Aside from this latest relief effort, remember that federal student loan payment suspension is still in effect through 9/30/21. For those that won’t be receiving loan forgiveness, you can still explore ways to lower your monthly payment or send extra dollars to debt to pay back your loans faster!

If you are fortunate enough to be able to make your monthly payments, keep doing so! With Federal student loan interest rates set to 0% and payments paused, every payment you make will be applied solely to the principal balance. This means your payments effectively save you double!

The FutureFuel.io platform has specific tools to accelerate your paydown period:

  • Giveback: Harness your purchasing power to earn cash back from 450+ mega brands like Walmart, DoorDash, Petco, Ace Hardware and more. Put merchants to work as you earn cash back on everyday purchases.
  • Round Up: Sweep spare change from everyday purchases straight to student debt. The average user saves $4,900 in interest and 23 months off their loans with $20/month in Round Ups.
  • Auto-Crush: Schedule one-time or recurring payments to your loans. Save an average of $13,500 and become debt-free 4 years sooner with an extra $50 payment per month

Final Thoughts

Student loan forgiveness remains a fiercely debated issue across lawmakers. The provision included in the American Rescue Plan Act of 2021 offers immediate relief for those in the waning years of their IDR plan. And it may pave the way for forgiveness via Executive Action. FutureFuel.io will continue to monitor the ever-changing legislative landscape and keep you updated on how it may affect your student loans. In the meantime, see if you could qualify for an IDR plan and loan forgiveness via FutureFuel.io’s Reassess tool.