Good News for People Who Have Student Loans in 2021

This post is in: Blog, Business
No Comments

No Interest, Student Payments On Hold 

In early 2020, student loans were put on pause through September 30, 2020. The interest would also not accrue. Then this was extended through January 31, 2020. 
On January 20, 2021, President Biden extended the student loan pause until September 30, 2021. No payments are due for federally funded student loans and interest does not accrue.  

Employer Can Make Deductible, Tax-Free Student Loan Payments 

The CARES Act (March 2020) allowed employers to contribute $5,250 toward an employee’s student loan balance. It is a deduction for the employer and it’s tax free for the employee. There is one thing to note, though. The “tax free” refers just to federal income tax. Payroll tax is still due. State tax may still be due.  This was through the end of 2020.  

The December 2020 coronavirus economic stimulus act extended this education benefit through December 31, 2025. 

There are a couple of things to note with this change.  


  • The business gets a deduction for the principal for student debt paid, up to $5,250. If interest is paid, it will still be deductible for the business. But the employee will have to pay tax on the amount of interest paid 
  • The employee doesn’t have to pay tax on principal paid on his or her student loan debt. Interest payments would be taxable to the employee.  
  • The exclusion is for federal income tax. It’s possible there could be a state income tax exclusion as well. Check on your state laws. 
  • Payroll taxes will still be due on the amount paid. The business will have to make arrangements to have the payroll tax withheld from other payroll to the employee so that it can be remitted on the next quarterly payroll report.  

As an example, let’s say an employer pays $5,000 toward an employee’s student debt. And of that $5,000, $4,000 is principal and $1,000 is interest. The employer has a deduction of $5,000. The employee has to pay payroll tax (social security & Medicare) on the full amount of $5,000 and will have to pay federal tax on $1,000.  

What Could Be Coming Next Regarding Student Debt 

There is a lot of conversation regarding student debt and possible changes. Here are two that may be included in future tax bills.  

Student Loan Forgiveness in Bankruptcy 

It may be possible to receive student loan forgiveness through bankruptcy if there is extreme financial hardship. But, it’s difficult and definitely not certain that you will receive it.  

Otherwise, there is no easy way to get your student debt discharged in bankruptcy. This is something that President Biden has called for to be changed and there is bipartisan support in Congress as well to allow borrowers to discharge student loans in bankruptcy.  

It’s possible that this may be allowed instead of student loan forgiveness.  

Student Loan Forgiveness 

There is talk about cancelling $10K of student loan debt. There is talk about cancelling $50K of student debt for any taxpayer who earns less than $125,000/year.  

According to a plan that had been posted to Biden’s website at one point, individuals making $25K or less per year would not have to make loan payments and interest would not accrue on those loans.  

Also in the plan, those who have responsibly made payments through the program for 20 years will have the debt completely forgiven.  

For public servants, Biden had discussed creating a program that offers $10K of debt relief for every year of national or community service, up to 5 years.  

None of these ideas are currently in proposed bills. We don’t know what will happen for sure, until the bills actually are passed.  

For now, just make sure you’re staying current on tax laws and the latest tax strategies.  

Leave a Comment