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Congress makes student debt forgiveness tax-free, limits revenue that for-profit colleges get from enrolling veterans

Democrats secure long-standing education-policy priorities in $1.9 trillion stimulus package

House Speaker Nancy Pelosi (D-Calif.) praised the American Rescue Plan on March 9 ahead of its expected passage. (Video: The Washington Post)

President Biden is slated to sign into law this week a $1.9 trillion stimulus package that clears one hurdle for broad student debt cancellation and tightens federal regulation of for-profit colleges.

Congressional leaders seized an opportunity to accomplish some long-standing objectives through the latest pandemic relief bill, which passed the House on Wednesday. Chief among them is eliminating the tax burden many student loan borrowers would face if any portion of their debt was discharged.

The tax relief is good only through January 2026, but lawmakers say it is a key step in canceling some of the $1.5 trillion in federal student loans held by 45 million Americans. Among the many concerns surrounding widespread forgiveness is whether debt relief would be subject to taxation, which could undermine the benefit to borrowers and ultimately the economy.

View the $1.9 trillion stimulus bill

“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,” Sen. Elizabeth Warren (D-Mass.) said in a statement after the Senate passed the stimulus package Saturday.

Biden in February rejected a call from Warren and Senate Majority Leader Charles E. Schumer (D-N.Y.) for $50,000 in debt cancellation through executive action, citing his reluctance to forgive the education debt amassed by graduates of elite private universities. Still, the president has expressed a willingness to cancel $10,000, and White House press secretary Jen Psaki said the administration is reviewing his authority on the matter.

Biden at odds with Democratic leaders over lawmakers’ call to cancel up to $50,000 in federal student debt

Warren and Sen. Robert Menendez (D-N.J.) first introduced a similar bill to make debt forgiveness tax-free in 2016, but the legislation stalled in committee. The latest version of that bill is far more expansive in that it covers all student loans originated by the government and private lenders.

Lawmakers say the average student borrower who earns $50,000 in income would save approximately $2,200 in taxes for every $10,000 of forgiven student loans.

Before now, there were few circumstances that afforded student loan borrowers tax-free forgiveness. Permanently disabled borrowers and public servants that receive federal debt cancellation are spared a tax bill. That is not the case for people whose balances are forgiven after 20 or 25 years of repayment through federal income-driven loan plans.

The new tax-relief provision will level the playing field, albeit for five years.

The Education Department could not immediately provide the number of people who are on track to receive loan forgiveness through its income-driven repayment plans before 2026. According to the latest data from the agency, there are roughly 9 million borrowers enrolled in those plans, which cap monthly payments at a given percentage of earnings over two decades with the promise of debt cancellation at the end.

It is unlikely that many borrowers in income-driven repayment will benefit from the tax relief. Although the plans have existed since the 1990s, few people took advantage of them until the Obama administration expanded eligibility and some have had trouble remaining enrolled, with annual requirements to certify their income. Fewer than 50 people have received forgiveness to date, according to the Education Department.

Another long-standing legislative objective that will be realized through the American Rescue Plan passed in the House on Wednesday is change involving the 90/10 rule for for-profit colleges.

Republican leader backs restrictions that could end for-profit colleges’ aggressive recruitment of veterans

That rule prohibits for-profit colleges from getting more than 90 percent of their operating revenue from federal student-aid funding. Because military and veterans’ education benefits do not count toward that threshold, some veterans groups say for-profit colleges aggressively recruit military members. Nearly a third of GI Bill tuition benefits went to for-profit schools in 2017, according to the Government Accountability Office.

Congressional Democrats have fought for more than a decade to end the exemption and picked up Republican support along the way. Although Sen. Rick Scott (R-Fla.) attempted to strip the provision from the stimulus package, Sens. Thomas R. Carper (D-Del.), James Lankford (R-Okla.), Bill Cassidy (R-La.) and Jerry Moran (R-Kan.) offered a compromise to delay implementation of the change by two years.

“Millions of military and veteran students use their hard-earned education benefits at a variety of educational institutions,” Carper said on the Senate floor Saturday, adding, “Unfortunately, we’ve seen some poor outcomes for our veterans and for taxpayers from bad actors in the for-profit college sector.”

The compromise amendment gives the Education Department time to flesh out the rules and Congress time to work with veterans groups on a bipartisan plan to strengthen the regulation, said Carper, a 23-year veteran of the Navy and Navy Reserve. He and other senators involved in the amendment had in 2019 sponsored legislation, dubbed the Protect Vets Act, to end the exemption and impose penalties for violations of the revenue rule.

Military organizations and veterans groups voiced concerns that predatory schools will continue to target veterans, but they hailed the compromise.

“A bipartisan solution is always a stronger solution,” said Tanya Ang, vice president of the advocacy group Veterans Education Success.

Proponents of the revenue rule say that too many for-profit colleges fail to graduate students and leave them with high debt loads that many borrowers struggle to repay. They say imposing restrictions on the federal dollars going to such schools is therefore necessary to protect students and taxpayers.

For-profit colleges have argued that the entire industry should not be penalized for the behavior of a few bad actors. They say the revenue rule is not a good measure of the quality of education provided by colleges and could limit education choices for veterans.

Still, Jason Altmire, chief executive of Career Education Colleges and Universities, which represents for-profit colleges, called the Senate amendment a “huge step in the right direction,” saying in a statement that it “will allow time for a fair, rational, and permanent solution.”