Senate relief bill would exempt student loan forgiveness from taxes

Senate Democrats’ proposed $1.9 trillion coronavirus relief package, unveiled Thursday, would exempt from taxes student loan forgiveness from 2021 through 2025.

The exemption would apply for forgiveness of student loans that were made, insured or guaranteed by the federal or state governments, as well as loans made by private lenders and educational institutions. It would not apply in cases where the loan discharge was made by an educational institution or private lender in exchange for services performed for them.

The Joint Committee on Taxation estimated that the provision would cost $44 million over 10 years.

Under current law, the cancellation of debt generally is included in taxable income, and student loan forgiveness is tax-exempt only in certain circumstances.

The Senate is expected to pass the relief package this weekend, but lawmakers are still negotiating the details of the bill, particularly those related to unemployment benefits.

The relief package does not itself discharge student debt. But the provision on exempting student-loan forgiveness from taxes could help to prevent people from facing large tax bills if their debt is forgiven in the future.

President Biden has said he’s interested in canceling up to $10,000 per borrower, preferably through legislation. Many progressives want the president to cancel up to $50,000 per borrower and to do so through executive action.

“The provision in the Senate bill is likely a necessary precursor to any kind of blanket forgiveness,” said Matthew Chingos, vice president for education data and policy at the Urban Institute.