The Senate on Saturday approved President Biden’s massive $1.9 trillion stimulus package. Included in the legislation is a small but major tweak to student loan law that could have significant impacts on student loan borrowers who are repaying their loans under income-driven repayment plans. Specifically, a provision of the stimulus legislation temporarily exempts student loan forgiveness from taxation. This has major implications for student loan borrowers who expect to obtain student loan forgiveness through income-driven repayment plans like Income-Based Repayment (IBR), Income-Contingent Repayment (ICR), Pay As You Earn (PAYE), and Revised Pay As You Earn (REPAYE). Income-driven repayment programs are a lifeline to millions of federal student loan borrowers. The term “income-driven repayment” describes a collection of plans that calculate a borrower’s monthly student loan payment based on their income. These plans include Income-Based Repayment (IBR), Income-Contingent Repayment (ICR), Pay As You Earn (PAYE), and Revised Pay As You Earn (REPAYE). While each plan is different, they all function similarly on a basic level. Monthly payments under income-driven plans use a formula based on the borrower’s family size and taxable income (typically their Adjusted Gross Income (AGI) as reported on their federal tax return). Payments are recalculated every 12 months, so as the borrower’s income changes, their payments would change, as well. Importantly, any remaining balance would be forgiven at the end of the plan’s repayment term, which is either 20 years or 25 years, depending on the specific program. For millions of borrowers, an income-driven repayment plan is the only affordable repayment option. But it comes with a significant catch. In addition to affordable payments, income-driven plans like IBR, ICR, PAYE, and REPAYE provide for forgiveness of the borrower’s federal student loans at the end of their repayment programs. This is important, because many student loan borrowers would never be able to fully repay their student loans otherwise. But traditionally, this type of student loan forgiveness is treated as a taxable event. In other words, the balance that gets forgiven at the end of the loan’s repayment term could be treated as “income” to the student loan borrower for tax purposes. This has major ramifications — particularly for borrowers whose payments under an income-driven repayment plan are not high enough to cover interest accrual, which can result in balance growth, even while payments are made. Here’s an example. Let’s take a single borrower who has a federal student loan balance of $60,000 at a 6% interest rate. Let’s say she has a current and projected annual taxable income of around $35,000 per year (for simplicity, we will assume no major changes to her income over time).


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