Many have speculated that a student loan provision in the recent stimulus bill means that loan cancellation is coming.
This new provision is excellent news for many borrowers. The law now says that any student debt forgiven until December 31, 2025, is tax-free.
The thinking is that the groundwork is in place for President Biden to cancel some student debt. Many Democratic Senators encouraged this theory.
Unfortuantely, while tax-free forgiveness might indicate changes on the horizon, it probably doesn’t mean cancellation.
Why Make Forgiveness Tax-Free if you are not Going to Forgive Some Loans?
It would be great if all borrowers benefited from tax-free loan cancellation.
Sadly, this particular legislation helps a smaller group of borrowers.
Just over 25 years ago, the federal government introduced the first income-driven repayment plans. To date, only a few have qualified, but many more will earn forgiveness in the coming years.
Many IDR borrowers have feared a student loan tax bomb, where large amounts of student loan forgiveness become a massive tax bill. Thanks to the new stimulus legislation, those who earn forgiveness in the next few years will get it tax-free.
The Lines Have Been Drawn on the Issue of Student Loan Forgiveness and Cancellation.
Liberal Senators like Elizabeth Warren and Chuck Schumer want $50,000 of student loans canceled per federal borrower. They argue that President Biden can do it with the stoke of a pen, meaning he can sign an executive order forgiving the debt.
President Biden wants to cancel $10,000 of student loans per federal borrower. He has argued that he doesn’t think he has the authority to do it by himself. He wants Congress to pass a law forgiving $10,000 per borrower. However, his position on this issue may be changing.
Republicans appear uniformly opposed to either option.
If Congress Wanted to Cancel Debt, They Could Have Done It.
The stimulus bill changes a tax on student loan forgiveness. It doesn’t actually forgive any student loans.
An argument could be made that Congress wanted to keep the cost of the bill down as much as possible, so they added the tax-free language so that Biden could cancel the loans on his own.
However, if this was the goal, there was a much easier way of accomplishing it. Biden’s hesitation with canceling via executive order is that he thinks he doesn’t have the authority to do it. Congress could have added legislation that gives the President the right to cancel all student loan debt. This provision wouldn’t have added any additional cost to the bill, and it would have empowered President Biden to cancel the debt.
The Student Loan Language in the Stimulus Bill is Still Good News.
Borrowers obviously want more, but the new student loan rules on tax are a positive step forward, and we have taken many positive steps forward.
Just a few years ago, the idea of federal loan cancellation was a borrower pipe-dream not seriously discussed by most politicians. Now, Democrats debate the best way to cancel the debt.
Additionally, for the borrowers who have been toiling on an IDR plan for decades, the tax change is terrific news. If borrowers can read anything into this legislation, it probably means that the tax bomb is dead. As an IDR borrower, I’ll still be planning for it, but I’m optimistic that it won’t’ ever happen.