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5 Steps To Tax-Free Student Loan Cancellation

This article is more than 3 years old.

Here are 5 steps to get tax-free student loan cancellation.

Here’s what you need to know.

Student Loans

The new stimulus bill, which the Senate passed Saturday and President Joe Biden is expected to sign soon, includes a provision that would make student loan cancellation tax-free. This includes not only private and federal student loans, but also FFELP Loans. This game-changer would also make any wide-scale student loan cancellation tax-free, if Congress cancels student loans or the president forgives student loans by executive order. In the mean time, you can get student loan cancellation by taking these 5 steps:

1. Enroll in an income-driven repayment plan

Contact your student loan servicer to enroll in an income-driven repayment plan. Income-driven repayment plans are available for federal student loans only (not private student loan debt), and they can help you get a lower monthly payment. Why? Income-driven repayment plans are based on your monthly discretionary income, family size and state of residence. If you are struggling to pay student loans or are unemployed, income-driven repayment plans can be especially helpful. Importantly, enrollment isn’t automatic; you have to enroll in an income-driven repayment. That said, Biden has a plan to change student loans that would make income-driven repayment enrollment automatic.


2. Certify your income to get a lower student loan payment

With an income-driven repayment plan, it’s possible to get a monthly student loan payment as low as $0. The main driver of your monthly student loan payment will be your income. Contact your student loan servicer to certify your income. If you have already certified your income, you will be asked to recertify your income each year. If you lose your job, for example, you can get a lower monthly student loan payment. Currently, federal student loan payments are paused through September 30, 2021. Now is a good time to recertify your income so that when student loan payments commence on October 1, 2021, your monthly student loan payment will be based on your correct income.


3. Choose the right income-driven repayment plan for student loans

There are four main types of income-driven repayment plans:

  • Income-Based Repayment (IBR)
  • Pay As You Earn (PAYE)
  • Revised Pay As You Earn (REPAYE)
  • Income-Contingent Repayment (ICR)

Choose the best income-driven repayment plan based on your specific financial situation. Typically, each plan will require a monthly student loan payment that is based on a percentage of your monthly income, ranging from 10-20%. With a student loan calculator, compare which income-driven repayment maximizes your student loan forgiveness.


4. Make student loan payment in full and on-time

This sounds obvious, but it’s essential if you want to get student loan forgiveness. To get student loan forgiveness, you will need to make on-time monthly payments in full every month for 20 years (undergraduate student loans) or 25 years (graduate student loans). If you meet these requirements, your remaining student loan balance will be forgiven completely. How do you get tax-free student loan forgiveness? The stimulus bill makes student loan forgiveness tax-free for a period of five years: from January 1, 2021 through December 31, 2025. If you’re enrolling today in an income-driven repayment, you wouldn’t qualify for tax-free student loan forgiveness before the tax-free provision is set to expire. That said, Congress could extend tax-free student loan forgiveness beyond December 31, 2025 on either a temporary or permanent basis. If Democrats control Congress, expect that tax-free student loan forgiveness will be available (although there is no guarantee) beyond December 31, 2025.


5. Get tax-free student loan forgiveness faster

You may be asking how you can get student loan forgiveness today. You may not want to wait 20 or 25 years to get your student loans forgiven. If Congress passes student loan cancellation or the president cancels student loans by executive order, it’s possible you can get upfront student loan cancellation. However, besides income-driven repayment, there is another way to get tax-free student loan forgiveness. It won’t come today, but you also won’t have to wait 20 or 25 years. It’s called Public Service Loan Forgiveness, and it’s a federal program that will cancel your federal student loans after 120 monthly student loans payments. You’ll have to meet several requirements, including working full-time for a qualified public service or non-profit employer and making on-time payments in full each month. After meeting all the requirements, you can get tax-free student loan forgiveness. Biden has a plan to simplify public service loan forgiveness and offer student loan forgiveness up to $50,000 after five years, which could cut the waiting time to get student loan cancellation in half.

As you consider strategies to pay off student loans faster, here are some potential options for student loan repayment:


Student Loans: Related Reading

17 million won’t get stimulus checks—expect the same for student loan cancellation

Student loan cancellation excluded from new stimulus package

Student loan cancellation less likely if stimulus checks get cut

Bernie Sanders: Let’s cancel student loans without Republicans

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