Home Madrid Economy What Every Student Loan Borrower Should Know About The New Relief Law

What Every Student Loan Borrower Should Know About The New Relief Law


The tax code provides for several exceptions to this logical treatment, one of which concerns student loans. If the loan requires a student to work “for a certain period of time in certain occupations” in exchange for “paying off the loan,” then that paid debt is excluded from taxable income. A similar exception applies to students who work for public interest organizations such as public defender’s offices or non-profit hospitals for at least ten years. But apart from these two situations, when a student loan is canceled, the released balance is generally taxable.

The new provision concerns so-called “income-based repayment” student loans that require a person to pay amounts based on their annual income for twenty or twenty-five years, depending on the specific program involved. After this time, any remaining loan balance is canceled. Prior to the adoption of this new provision, the remaining loan balance was taxable in the year the loan was canceled. The new provision, however, makes the forgiven loan balance tax-exempt if the forgiveness occurs between 2021 and 2025.

This arrangement is remarkable for three distinct reasons. First, while all other payments and tax credits included in the American Rescue Plan Act only apply to 2021, this provision applies for a full five years. Second, there is no dollar limit on the amount of forgiven debt that can be considered tax-free income. And third, there is no income limit for taxpayers who can avail themselves of this provision, unlike the other benefits provided for in the new law.

This new provision is a huge benefit to taxpayers who complete their required payback period within the five-year term of this provision, and other student borrowers may hope that this provision could be extended beyond 2025. Although the new The law does not cancel any student loans, it could foreshadow more important changes to come.

Richard L. Kaplan holds the Guy Raymond Jones Chair in Law at the University of Illinois College of Law at Urbana-Champaign.


Please enter your comment!
Please enter your name here