Study the New Breaks for Student Loans

The tax law provides a limited deduction for interest paid on student loans. But some borrowers may get special treatment this year.

The Coronavirus Aid, Relief and Economic Security (CARES) Act grants more leeway to certain taxpayers. They don’t even have to make any payments on qualified student loans until October 1, 2020.

Generally, the CARES Act provisions for student loans apply to direct loans and Federal the U.S Department of Education (ED).

The annual deduction for student loan interest is limited to the first $2,500 of interest paid for qualified expenses. This includes tuition and fees; room and board; books, supplies and equipment; and other necessary expenses, such as transportation.

Certain requirements must be met. Notably, the deduction for student loan interest is phased out, based on income levels. But now the CARES Act provides the following benefits:

  • Payments on non-defaulted direct loans and FFEL loans currently owned by the ED are suspended from March 13, 2020 through September 30, 2020.
  • There is no interest accrual while the loan payments are suspended.
  • For credit reporting purposes, any payment that has been suspended under the new law is treated as if the borrower had made a regularly scheduled payment.
  • Involuntary collection of defaulted direct loans and FFEL loans is suspended until September 30, 2020.
  • If a borrower is forced to withdraw from school due to the COVID-19 pandemic, the Secretary of Education must cancel the direct loan associated with the payment period.

Finally, the CARES Act also includes a new variation of a popular employee fringe benefit. With a regular “educational assistance plan” (EAP), the first $5,250 of benefits paid to an employee is exempt from tax. The new law extends this EAP rule to payments on student loans through the end of 2020.

Small Business Tax Strategies

July 2020