CARES Act Carves Out New Benefits for Student Loans

The CARES Act includes several provisions that benefit taxpayers who are currently obligated to pay off student loans during this national health crisis. Expert Ken Berry explains what you need to know.

May 26th 2020
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The Coronavirus Aid, Relief and Economic Security (CARES) Act provides some much-needed financial support to individuals and businesses through stimulus payments, favorable loan programs, extra unemployment benefits and a variety of tax breaks. But the new law goes even further than that. Notably, it also includes several provisions that benefit taxpayers who are currently obligated to pay off student loans during this national health crisis.

Generally, the provisions for student loan borrowers apply to Direct Loans and Federal Family Education Loans (FFEL loans) currently owned by the U.S. Department of Education (ED). Specifically, it provides the following:

  • Payments on non-defaulted Direct Loans and FFEL loans currently owned by the Department are suspended from March 13, 2020 through September 30, 2020.
  • No interest will accrue while the loan payments are suspended. Because this provision applies only to loans for which payments have been suspended, that means that it only applies to Direct Loans and to FFEL loans currently owned by the ED.
  • For each month in which a loan payment or involuntary collection is suspended, it will be treated as if the borrower made a payment for purposes of any loan forgiveness or loan rehabilitation program he or she would have otherwise qualified for.
  • Any payment that has been suspended under the new law is treated as if the borrower had made a regularly scheduled payment for credit reporting purposes.
  • The new law suspends all involuntary collection of defaulted Direct Loans and ED-owned FFEL loans until September 30, 2020. This covers non-judicial wage garnishments, tax offsets and seizure of Social Security benefits, among others.
  • If a borrower is forced to withdraw from school due the coronavirus pandemic, the Secretary of Education must cancel the Direct Loan associated with the payment period in which they withdrew.

Finally, the CARES Act also includes a new twist on a popular employee fringe benefit. Under the new law, employers can pay up to $5,250 of an employee’s student loans through the end of the year on a tax-free basis. Generally, such payments constitute wages, but those made before January 1, 2021 are exempt from the usual income and payroll tax obligations. Thus, this rewards both employees and employers.

This provision is tied to the tax code section authorizing tax-free educational assistance plans. To qualify for the tax breaks, the payments must be made in compliance with a written plan. Among other requirements, employees can’t have an option between educational assistance and taxable remuneration. In other words, an employer can’t allow its employees to receive cash in lieu of the assistance on student loans.

There are still remaining questions relating to the benefits for student loans under the CARES Act, so we will keep an eye out for IRS guidance in the near future. In the meantime, encourage clients to investigate the possibilities for their families and their businesses.   

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