Under the American Rescue Plan Act of 2021, an individual may exclude from gross income the amount of qualified student loans cancelled or discharged in 2021 through 2025.
In general, a taxpayer’s gross income generally includes any income realized if any debt he or she owes in cancelled or discharged, other than as a gift or bequest. There is an exception for student loans discharged or forgiven if the student works for a certain period in a designated profession for any of a broad class of employers such as those serving in under resourced communities. Also, student loan payments made under a repayment assistance program of the National Health Service Corps or similar state program are not included in gross income. However, the exclusion does not apply to the extent that the taxpayer is insolvent or is involved in a bankruptcy case.
The American Rescue Plan expands the exclusion of discharged student loans after 2020 through 2025 for qualified student loans. Qualified student loans include loans for post-secondary education provided by the government or educational institution, private education loans, and original and refinanced loans from tax-exempt organizations with a public service requirement, and refinanced loans. The exclusion does not apply to private education loans or loans from tax-exempt organizations if the discharge is on account of services provided to the lending organization.
The new exclusion of income from discharged student loans after 2020 through 2025 replaces the existing exclusion for income from student loans discharged after 2017 because of the student’s death or total and permanent disability. The new exclusion covers discharges for much broader reasons and is not limited to death and disability of the student.
If you have any questions related to the exclusion of income for student loan forgiveness, or any other provision of the American Rescue Plan, please contact the Crosslin tax team at 615-302-5500. We are here to help!