Non-taxable student loan forgiveness won’t immediately impact current student borrowers

A new non-taxable status for student loan forgiveness may benefit longtime borrowers but will not do the same for current students.



U.S. President Joe Biden delivers remarks on the COVID-19 response and the vaccination program during an event at the State Dining Room of the White House on May 4, 2021, in Washington, DC. President Biden set a new goal to have 70% of adult Americans with at least one shot and at least 160 Americans fully vaccinated by July 4th, 2021.

Brian Grace, Politics Reporter

A provision in President Joe Biden’s American Rescue Plan Act of 2021 that makes federal student loan forgiveness tax free until 2025 won’t have a significant immediate impact on students with relatively new loans, but could prove more beneficial if Biden directly cancels student loans in future legislation, according to the University of Iowa Office of Student Financial Aid.

Biden said during his presidential campaign that he would advocate for legislation to cancel $10,000 in student loans per borrower. So far, he hasn’t introduced any legislation to do that, though some Democrats like Sens. Elizabeth Warren, D-Mass., and Chuck Schumer, D-N.Y., are pushing for legislation forgiving loans at an amount of $50,000 instead.

Section 9675 of the American Rescue Plan states that the non-taxable status will apply to all forms of student loan forgiveness, effective from Dec. 31, 2020 until Jan. 1, 2026.

Historically, any loan forgiveness a borrower receives would be reported to the IRS and classified as income, which would then be taxed based on the borrower’s tax bracket. This provision effectively ensures that if the borrower does have a certain amount of their loans forgiven, they won’t need to pay anything on that forgiveness.

For example, if Biden passed legislation resulting in the forgiveness of $10,000 worth of student loans per borrower, and the borrower made $50,000 per year within a tax bracket of 22%, the borrower would have needed to pay $2,200 in taxes on the forgiven loan.

Cindy Seyfer, assistant provost and director of the UI’s Office of Student Financial Aid, said the tax-free status will be substantially more important for borrowers who have been making payments on student loans for 20 to 25 years through an income-driven repayment plan. Such plans allow borrowers to make monthly payments on loans based on income and family size, according to the Federal Student Aid website.

For those utilizing an income driven repayment plan, borrowers who haven’t paid off the entirety of their student loans by the time their payment period is up, but have paid toward it consistently on time and in accordance with the plan they were given, have the remainder of their loans forgiven. This population will benefit from new tax-free status of loan forgiveness most noticeably, but Biden’s provision applies to anyone with student loans and receives loan forgiveness.

“After the 20- or 25-year period, depending on the plan, the remainder of the loan is forgiven but, in the past, this dollar amount was taxable,” Seyfer said. “This could make a significant impact on taxable income. Now with the tax-free status for student loan forgiveness, there would not be any tax implication on the portion of the loan that is being forgiven.”

Seyfer said currently enrolled students could see more of an impact from this piece of legislation if Biden ultimately implements direct loan forgiveness, such as his administration’s baseline target of canceling $10,000 in student loans per borrower.

The U.S. Federal Reserve estimates that as of Dec. 2020, U.S. citizens owe slightly over $1.7 trillion in student loans combined, while on average, individual borrowers owe $32,000.

Will Eggers, a UI junior from Algona studying political science on the pre-law track, said that even though he does currently have student loans, he hadn’t heard of the tax-free provision and doesn’t think it will benefit him. He said loan forgiveness should target underrepresented and underprivileged students rather than forgiving loans for large swaths of populations who might not need it.

Sheyanne Koethe, a UI senior from North Liberty studying health and human physiology, said she doesn’t agree with sweeping cancellation of student loans, but moderate loan relief legislation would be worth pursuing. Koethe said she hasn’t taken out student loans for her undergraduate degree but anticipates doing so when pursuing a master’s degree in hospital administration following a gap year in which she’ll continue working at a local medical clinic.

“Nobody should be $100,000 in debt after they graduate, that’s going to be a couple of years before they actually save money, that’s ridiculous,” Koethe said. “But at the same time, I don’t agree with complete cancellation of student loans…if I had a loan I would still expect to pay something for college. I feel like the idea of free college is just not really plausible.”

According to the National Center for Education Statistics, the average total price to attend any college (four year, two year, private, public) has increased from $4,885 in 1985 to $23,835 in 2017. That number has increased by anywhere from $500 to $1,000 each year, with the total price including tuition, room and board, and additional fees charged by the institution.

Biden announced the American Families Plan on April 28. While the plan includes goals such as giving Americans two years of free community college and “making college more affordable for low-income families,” the plan does not include canceling broad student debt.

The U.S. Department of Education, however, has announced that some form of relief would be coming to certain populations of borrowers, including permanently disabled borrowers at risk of having discharged loans reinstated and borrowers who could prove their educational institution participated in misconduct with their loans.

U.S. Sen. Chuck Grassley, R-Iowa, wrote in an email to The Daily Iowan that he has serious concerns about the Biden administration’s proposals to cancel student debt because it would disproportionately benefit students and families with above average incomes.

Grassley is referring to statements Biden made during his presidential campaign that advocated for forgiving $10,000 in student loan debt per borrower.

“It’s unfair to taxpayers who saved for college, or paid off their loans or who do not have a college degree to pay for the obligations others willingly took on,” Grassley wrote. “And on top of that, only a third of Americans hold a bachelor’s degree or higher while the majority debt is held by individuals with graduate degrees like doctors and lawyers.”

Grassley wrote that relief should be targeted at students based on need and address why graduates are leaving college with so much debt.

“Incoming students need to have the full picture and a breakdown of what the true cost of college is before they sign on to take out more loans than they need or can afford with the degree they are seeking,” he wrote.