Covid-19 Rescue Plan Has More Than Just Tax-Free Student Loan Forgiveness (2024)

The $1.9 trillion Covid-19 legislation includes several provisions that benefit college students, not just tax-free status for student loan forgiveness.

The American Rescue Plan Act of 2021 (P.L. 117-2) , which was signed into law on March 11, 2021, provides a lot of additional funding for current college students and recent college graduates.

Higher Education Emergency Relief Fund (HEERF). Colleges will receive almost $40 billion for the Higher Education Emergency Relief Fund, at least half of which must be used for emergency financial aid grants to students. This comes after $14 billion in HEERF funding from the CARES Act and $23 billion from the CRRSA Act.

The allocation formula is similar to the previous allocation formulas, except that there will be a reduced allocation for colleges with endowments over $1 million and an increased allocation for colleges with endowments under $1 million, including colleges that do not have endowments.

The emergency financial aid grants are no longer limited to students who are eligible for Title IV federal student aid, but it is unclear whether DACA students and international students are eligible.

The emergency financial aid grants may be used by students to pay for college costs and emergency costs related to the pandemic. Colleges must give priority to students with exceptional financial need, but can otherwise decide how to award the grants to students.

The colleges receiving HEERF funding are required to conduct outreach to students about the opportunity to appeal for more financial aid due to the recent unemployment of a family member or other special circ*mstances.The Free Application for Federal Student Aid (FAFSA) bases income and tax information on the prior-prior year. For example, the 2021-2022 FAFSA is based on 2019 income, which is pre-pandemic. More than a third of American workers lost their jobs or experienced pay cuts in 2020, so 2019 income is not likely to be reflective of ability to pay for college for many families.

Recovery Rebate. College students are eligible for the $1,400 stimulus checks. Parents will be able to claim $1,400 per dependent. The definition of dependent includes children under age 19 and full-time students under age 24. Previously, the definition was limited to children under age 17. Eligibility phases out for taxpayers with income of $75,000 to $80,000 (single filers) and $150,000 to $160,000 (married filing jointly). The stimulus checks go to the parents, not the student, but parents can choose to share the money with their children or keep it for themselves.

Increased Child Tax Credits. The child tax credit is increased from $2,000 per child to $3,600 for children under age 6 and $3,000 for children age 6 to 17. Not only does this increase the child tax credit, but it extends it to include children age 17. Some college freshmen will be eligible, since 0.8% of dependent undergraduate students are age 17 and younger. Eligibility for the increased child tax credit phases out for taxpayers with income of $75,000 to $200,000 (single filers) and $150,000 to $400,000 (married filing jointly).

Help Completing the FAFSA. The U.S. Department of Education will be receiving $91 million for student aid administration to “prevent, prepare for, and respond to coronavirus including direct outreach to students and borrowers about financial aid, economic impact payments, means-tested benefits, unemployment assistance, and tax benefits, for which the students and borrowers may be eligible.” The U.S. Department of Education will use this money to help students complete the FAFSA and for other purposes. The number of students filing the FAFSA has decreased significantly during the pandemic, especially among low-income students and other at-risk populations.

Tax-Free Status for Student Loan Forgiveness. All types of student loan forgiveness will be tax-free through December 31, 2025. This includes the loan forgiveness after 20 or 25 years in an income-driven repayment plan, since most other forms of student loan forgiveness were already tax-free. It will also apply to future student loan forgiveness programs, such as President Biden’s proposal for $10,000 in student loan forgiveness per borrower.

Only borrowers who have been repaying their federal student loans in Income-Contingent Repayment (ICR) will qualify for forgiveness before the December 31, 2025 expiration of the tax-free status. Borrowers in ICR with just undergraduate loans may switch into the Revised Pay-As-You-Earn (REPAYE) repayment plan to qualify for loan forgiveness after 20 years instead of 25 years. More than 100,000 borrowers should qualify.

The tax-free status is likely to be extended or made permanent prior to expiration.

Employers may be able to use the tax-free status to provide employees with more tax-free student loan repayment assistance. Before passage, LRAPs could provide up to $5,250 per year in tax-free educational assistance, including student loan payments. Since all student loan forgiveness is now tax-free, employers can bypass the $5,250 limitation, except for loans refinanced by educational institutions or private education lenders for their own employees.

The tax savings per borrower is as much as $2,400 per $10,000 in loan forgiveness, assuming a 24% tax bracket.

Changes in the 90/10 Rule. For profit colleges must get no more than 90% of their revenue from Title IV federal student aid. The American Rescue Plan Act changes this rule to cover all federal student aid, not just federal student aid provided by the Higher Education Act of 1965. In particular, the 90/10 rule limitation will also apply to military student aid. Proponents of this change argued that omitting military student aid encouraged for-profit colleges to recruit veterans who were eligible for G.I. Bill and other college funding.

Changes to the Paycheck Protection Program (PPP). The Biden Administration has announced that the Paycheck Protection Program will be made available to small businesses that are owned by borrowers who are currently delinquent on their federal student loans or who defaulted within the last seven years.

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