Student Loan Relief from the U.S. Department of Education

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By Mark Kantrowitz

April 5, 2021

The U.S. Department of Education has taken a series of steps toward providing additional student loan forgiveness and relief in March 2021.

Payment Pause and Interest Waiver

On March 30, 2021, the U.S. Department of Education announced that 1.14 million borrowers with privately-held Federal Family Education Loan (FFEL) program loans in default will eligible for the payment pause and interest waiver. This student loan relief is in effect through at least September 30, 2021.

Collection activities against these borrowers, including administrative wage garnishment, offset of income tax refunds and reductions in Social Security disability and retirement benefit payments, will be suspended for the duration of the pandemic. This change is retroactive to March 13, 2020. Any previous income tax refunds and garnishments will be automatically returned to the borrower.

Borrowers who have defaulted on FFEL program loans since March 13, 2020 will have their loans returned to good standing and the default removed from their credit histories.

Total and Permanent Disability Discharge

On March 29, 2021, the U.S. Department of Education announced that 230,000 borrowers with total and permanent disability discharges will not have their repayment obligations reinstated for a failure to report their annual earnings paperwork.

Borrowers whose loans are discharged based on a doctor certification or a Social Security Administration (SSA) determination of eligibility are subject to a 3-year post-discharge monitoring period. If the borrower’s annual earnings exceed the poverty line for a family of two during this monitoring period, the repayment obligation will be reinstated.

The U.S. Department of Education has decided waive the reporting requirement during the COVID-19 pandemic. This waiver is retroactive to March 13, 2020. If a borrower’s repayment obligation has been reinstated since then, it will be reversed.

Borrower Defense to Repayment

On March 18, 2021, the U.S. Department of Education announced that 72,000 borrowers with approved borrower defense to repayment claims will receive full student loan relief, instead of the partial relief policy implemented by the previous administration. A total of about $1 billion in financial relief will be provided to these borrowers.

Borrowers may be eligible to have their federal student loans canceled, retroactively, under the borrower defense to repayment rules if they were defrauded by their colleges. Any payments previously made are refunded to the borrowers. These borrowers will also have their eligibility for federal student aid restored.

Tax-Free Student Loan Forgiveness

On March 11, 2021, President Biden signed the American Rescue Plan Act of 2021 (P.L. 117-2) into law. This $1.9 trillion COVID-19 bill provides tax-free status for all student loan forgiveness and student loan calculation through December 31, 2025.

Most types of student loan forgiveness for federal student loans were already tax-free prior to passage of the law. This includes Public Service Loan Forgiveness, Teacher Loan Forgiveness, death and disability discharges, closed school discharges, false certification discharges, unpaid refund discharges and borrower defense to repayment discharges.

However, the student loan forgiveness after 20 or 25 years in an income-driven repayment plan was previously taxable and will now be tax-free.

The American Rescue Plan Act of 2021 also makes college students eligible for the $1,400 recovery rebate payments. Parents can claim the recovery rebate for each dependent, which will now include full-time students under age 24. The stimulus checks are fully phased out at $80,000 in income for single filers and $160,000 for married filing jointly. Previous stimulus checks were limited to dependents under age 17.

Student loan forgiveness programs are only available to borrowers who have federal student loans. Those who do not qualify for forgiveness or discharge may consider refinancing their student loans.

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