Biden Plans To Make This Student Loan Forgiveness Benefit Permanent

President Joe Biden has plans to make a key temporary student loan forgiveness tax benefit permanent for all borrowers.

As part of the White House’s sweeping budget proposal released last week, Biden wants to keep certain student loan forgiveness programs tax-free for borrowers. Historically, some forms of debt cancellation can be treated as “income” to borrowers for tax purposes, potentially resulting in significant tax liability. Legislation Biden signed in 2021 temporary exempts most types of student loan forgiveness from federal taxation. But that relief is set to expire next year.

Here’s what you need to know.

Student Loan Forgiveness Can Be Taxable In Certain Cases

The federal tax treatment of student loan forgiveness varies considerably depending on the specific program.

Some types of student loan forgiveness are not taxable federally, period. This includes most profession-based loan forgiveness programs, such as Public Service Loan Forgiveness and the Teacher Loan Forgiveness programs. In addition, certain school-based discharge programs, such as Borrower Defense to Repayment, are also not taxable.

But other kinds of federal student loan forgiveness have historically been treated as taxable events. This includes loan forgiveness through Income-Driven Repayment plans, the Total and Permanent Disability (TPD) discharge program, and debt cancellation via the Higher Education Act’s “settlement and compromise” authority. In these instances, borrowers could receive a Form 1099-C, a tax form requiring borrowers to report the amount of cancelled debt as income for federal tax purposes.

Temporary Student Loan Forgiveness Benefit Under Biden Legislation

The American Rescue Plan Act, a sweeping stimulus bill that Biden signed into law in 2021, temporary exempts all federals student loan forgiveness from federal taxation. The Biden administration has approved over $130 billion in student loan forgiveness since then under various initiatives and tweaks to existing programs, including a sizable amount under IDR plans and the TPD discharge program.

“The American Rescue Plan Act included a provision temporarily modifying the tax treatment of discharged student loan debt,” says Education Department guidance on the IDR Account Adjustment, one of the administration’s more significant student loan forgiveness initiatives. “Specifically, the law excludes from gross income qualifying student loans that are discharged between Dec. 31, 2020, and Jan. 1, 2026. During this period, the amounts of forgiven student loan debt won’t be subject to federal taxation.”

But a handful of states may still consider student loan forgiveness to be taxable, even if the federal government does not. And the relief under the American Rescue Plan Act is temporary — the tax exemption is set to expire at the end of next year.

Biden Wants To Extend Student Loan Forgiveness Benefit

In the White House budget plan released last week, Biden proposes making the federal student loan forgiveness tax exemption permanent. If enacted, this means that loan forgiveness under the IDR and TPD programs would remain tax-free. In addition, it would mean that under Biden’s new student loan forgiveness plan currently in development, eligible borrowers would also not have to worry about federal tax consequences of loan forgiveness.

But as of right now, this is just a proposal. For the permanent student loan forgiveness federal tax exemption to become law, it would have to be approved by both the House and Senate. So far, Congressional Republicans have been hostile to many of the Biden administration’s student loan forgiveness initiatives, and may be unwilling to do anything that strengthens loan forgiveness programs.

If Congress does not pass Biden’s plan this year, there will be another opportunity in 2025 to extend the tax relief or make it permanent before it expires. But there is an intervening election in November, and that will likely determine the fate of this student loan forgiveness tax benefit.