The stimulus bill, which the Senate passed over the weekend, included a huge change in federal student loan policy. Since the creation of the income-driven repayment system, there has been one nagging problem with its implementation: Borrowers receiving student loan forgiveness have also been on the hook for a huge tax bill since forgiven student debt is considered taxable income. This bill wipes that all away by making all student loan cancellation tax free through 2025.
On one hand, this
is great news. This will make it so that borrowers who qualify for forgiveness
through making years of reduced, income-driven repayments would get relief from
their student debt without a huge tax bill in tow. This change comes with a
significant price tag, which is probably why it hasn’t passed previously, but
it’s very clearly the right step forward for the following reasons.
Income-driven repayment in the accompanying forgiveness provisions do an
adequate job of determining who should and shouldn’t have to repay their debt,
but considering loan forgiveness as taxable income undermines the means testing
that is incorporated into the eligibility criteria.
If and when the bill
gets signed into law, borrowers who are truly burdened by their debt will have
a clear path to financial salvation. In theory, this should lessen the pressure
on policymakers to implement some sort of widespread forgiveness plan. In
practice, however, this also sets the stage for the White House to cancel some
amount of student debt through executive action. There is debate over whether
this would be legal, but a bigger roadblock previously was that the Biden administration
couldn’t provide forgiveness without it resulting in beneficiaries also owing
taxes on each dollar of debt that was forgiven.
The income-driven repayment program isn’t perfect, but the mechanism by which it tests income over a number of years before providing forgiveness is the right one. We can argue about how generous it should be, but taxing on the back end is the wrong way to mitigate the benefits if we believe they are excessive. This was a win for students and sound policy, even if it put us on the proverbial slippery slope toward student loan cancelation through executive action.