The American Rescue Plan, passed into law in March 2021, is known mostly as pandemic-related relief bill, but it also focuses heavily on American education, including higher ed. The bill provided around $40 billion in funds to the nation’s colleges and universities and stipulated new tax breaks for forgiven student loans. The funds and other areas of the bill continue to impact college students and some student loan holders.
What is HEERF and how does it impact students?
Most of the ARP’s funding for colleges and universities is part of the Higher Education Emergency Relief Fund (HEERF), which was originally created under the CARES Act. By law, much of this money must go directly to students. Schools that already received HEERF funds under the CARES Act are required to spend at least as much on emergency financial aid student grants as they did the previous year. In most cases, this is around 50% of their HEERF funds. Schools receiving HEERF funds for the first time must spend at least 50% on grants, or 100% if they are for-profit institutions. Schools are required to prioritize students with exceptional financial need.
Students can spend the grants on school-related expenses or other “emergency costs related to coronavirus” such as food, housing, and child care. All of these grants are tax-free and do not need to be repaid.
How else can HEERF funds be spent?
Colleges and universities can use the remaining 50% of their HEERF funds to cover expenses such as payroll, staff training, technology to shift to distance learning, and other pandemic-related costs. While these funds don’t go directly to students, they are meant to help keep their schools running as normally as possible.
Extra funding for underserved demographics
Universities that primarily enroll underserved demographics, such as historically black colleges, tribal colleges, and Hispanic-serving colleges, are slated to receive an additional $3 billion in relief funding.
How do ARP grants impact tax credits and deductions?
If your clients received one of the grants described above, they can still claim the American Opportunity Credit or Lifetime Learning Credit as usual, as long as they otherwise qualify for these credits.
Before tax year 2021, students could count qualifying expenses paid for with these grants towards the tuition and fees deduction. However, for tax years 2021 and beyond, they can no longer apply expenses paid for with emergency grants toward this deduction.
Does the ARP forgive student loan debt?
While the ARP doesn’t directly forgive federal student loan debt, it does contain provisions that may provide relief for those with student debt.
Possible debt forgiveness from higher ed institutions
First, higher ed institutions are encouraged – but not required – to use part of their HEERF funds to discharge student debt. Even if they choose not to discharge student debt, they are required to use HEERF funds for student grants. Since these grants do not have to be repaid, students who receive them may face less student debt in the long run.
You should caution your clients to be wary of scams related to grants or loan forgiveness. The Department of Education has reported scams that promise “pandemic grants” or “Biden loan forgiveness” and encourages students to verify the legitimacy of these offers with their institution before giving out any personal information.
Paused student loan payments and 0% interest rates
The bill also temporarily paused monthly repayment requirements and dropped interest rates on loans from the Department of Education to 0%, retroactive to March 2020. These measures were originally set to expire September 2021 but have been extended to September 2022. There are no current plans to extend these relief measures again, so borrowers should prepare to resume payments this September.
Tax-Free loan forgiveness
Under the ARP, any federal student debt forgiven between December 2020 and January 2, 2026 won’t be considered taxable income. Currently, this change only benefits a relatively small number of borrowers who are on Income Contingent Repayment (ICR) plans. But if the Biden administration’s plans to forgive larger amounts of student debt come to fruition before 2026, far more taxpayers with student loans will benefit from the rule.
For more on the ARP and how it impacts your clients, see our article, Expanding the American Rescue Plan Act.
This article was last updated on 07/20/2022.