Here's how the $1.9 trillion stimulus bill helps college students and graduates

The $1.9 trillion stimulus package the Senate passed on Saturday — with adoption potentially coming as early as this week — includes some key provisions for college students and graduates.

The biggest benefit for student loan borrowers is a provision that exempts them from paying taxes when they receive forgiveness, helping those currently on a 20- or 25-year forgiveness program and potentially paving the way for the cancelation of student loan debt down the road — a big priority for some Democratic lawmakers.

Additionally, the plan allocates nearly $40 billion in aid to colleges and universities, while also closing a controversial loophole that critics said for-profit colleges have capitalized on.

Here's what to know.

Temporary tax exemption on forgiveness

When a student debtor’s loans are forgiven, it’s previously been considered as a taxable event. The amount forgiven is considered to be “income” and taxed bill based on the borrower's income tax rate. So a borrower with nearly $50,000 in debt canceled may incur thousands of dollars in taxes owed to the government.

The Senate’s new provision, called the Student Loan Tax Relief Act, was introduced by Senators Elizabeth Warren (D-MA) and Bob Menendez (D-NJ), specifically addresses this point: If the government forgives student loan debt between December 31, 2020 and January 1, 2026, that will be tax-free. This includes private and institutional loans.

"Now, when student loan borrowers get relief, they will not be burdened with thousands of dollars in unexpected taxes,” said Warren in a statement.

The tax-free exemption is already in place for borrowers who are on the Public Service Loan Forgiveness program.

'Make it easier to make it permanent'

There are two reasons why this matters: First, the tax-free exemption has implications for millions of borrowers nearing the final goal on income-driven repayment (IDR) plans that promise forgiveness after 20 or 25 years.

Although the current provision ends in 2026, experts say the provision indicates that it can become more permanent.

"Cracking the door like this with a temporary provision may very well make it easier to make it permanent down the road," Betsy Mayotte, president of the Institute for Student Loan Advisors, told Yahoo Finance, noting the tax bill issue is gaining traction among lawmakers.

While only 32 people have received forgiveness so far, based on data obtained by the National Consumer Law Center, the exemption smoothens a potential hurdle as many more borrowers qualify for cancelation over the next few years.

“This tax fix is critical to ensure that we can get relief to student loan borrowers without forcing them to trade one unaffordable debt for another,” said NCLC’s Persis Yu.

'Clears the way for President Biden' to cancel debt

Second, lawmakers like Warren believe the provision lays the groundwork for Congress or President Biden to enact broad cancellation of student debt.

“This change clears the way for President Biden to use his authority to cancel $50,000 in student debt to provide a massive stimulus to our economy, help narrow the racial wealth gap, and lift this impossible burden off of tens of millions of families,” Warren said.

Democratic lawmakers have been pushing for $50,000 in student debt cancellation, but Biden has expressed reluctance to do so via executive action.

Many opponents of cancellation maintain that forgiveness en masse misses the point, and is costly. “Student loan debt forgiveness is very expensive, regressive and does little or nothing to enable new people to go to college,” Jason Furman, a professor at Harvard University and a former economic advisor to former President Barack Obama, told Yahoo Finance.

Other provisions

Congress has also given the Education Department $91 million for student and borrower outreach, regarding “financial aid, economic impact payments, means-tested benefits, unemployment assistance, and tax benefits, for which the students and borrowers may be eligible.”

College students can also expect more aid: Nearly $40 billion in aid will go towards colleges and universities if the president's plan is passed. Half of that is directed at students.

Finally, the Senate also closed a loophole that critics of for-profit colleges have long been calling for by amending the House-passed version of the stimulus bill.

I have been fighting for a long time to close the 90/10 loophole that incentivizes #4profit colleges to target veterans and service members. I’m glad the American Rescue Plan finally does it.

— Senator Dick Durbin (@SenatorDurbin) March 6, 2021

For-profit colleges have previously been subjected to a rule that says they cannot derive more than 90% of their revenue from federal financial aid. But veterans’ and active duty servicembers’ G.I. Bill benefits or tuition assistance funds from the Department of Defense are not counted in this number.

This means these schools can actually receive up to 100% in federal financial aid effectively, going around the 90% limit by targeting and enrolling veterans and service members. A provision tacked onto the bill passed in the Senate says this loophole will be closed in 2023.

The amended bill is expected to go to the House for a vote this week, where it's expected to pass, before going to President Biden to sign into law.

Aarthi is a reporter for Yahoo Finance. She can be reached at [email protected]. Follow her on Twitter @aarthiswami.

Read more:

  • ‘Abysmal track record’: Few student loan borrowers received forgiveness through government repayment plan

  • Does America's preferred student loan repayment program work? 'That is the big question'

  • U.S. student loan system will lead to 'inevitable cancellation,' expert argues

  • Read the latest financial and business news from Yahoo Finance

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