Congress makes student debt forgiveness tax-free

WASHINGTON, D.C. – U.S. Senators Bob Menendez (D-N.J.) and Elizabeth Warren (D-Mass.) applauded passage of their Student Loan Tax Relief Act as part of the American Rescue Plan. The provision makes any college loan forgiveness tax-free, ensuring borrowers whose debt is fully or partially forgiven are not saddled with thousands of dollars in surprise taxes. The average student borrower who earns $50,000 in income would save approximately $2,200 in taxes for every $10,000 of forgiven student loans.

The tax relief is good only through January 2026, but lawmakers say it is a key step in canceling some of the $1.5 trillion in federal student loans held by 45 million Americans.

Among the many concerns surrounding widespread forgiveness is whether debt relief would be subject to taxation, which could undermine the benefit to borrowers and ultimately the economy.

The $1.9 trillion stimulus package that just passed through Congress, also known as the COVID-19 Relief Bill or the American Rescue Plan which makes student loan forgiveness free from federal taxation through 2025. Led by Democratic senators Elizabeth Warren and Bob Menendez.

The loans that are eligible for tax-free forgiveness include all federal student loans, federal parent loans.

She said in a statement: "This change clears the way for President Biden to use his authority to cancel $50,000 in student debt to provide a massive stimulus to our economy, help narrow the racial wealth gap, and lift this impossible burden off of tens of millions of families."

Menendez said in a statement: "Millions of Americans were already drowning under a mountain of student loan debt before getting hit with the economic impact of COVID-19. And when they're lucky enough to get some relief, the government shouldn't then tie a heavy tax anchor to their financial life line. We now have a tremendous opportunity to relieve this paralyzing weight and that opportunity should not be jeopardized by an arbitrary tax bill on unrecognized income."

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