Congress passed the $1.9 trillion Covid-19 relief legislation Wednesday, which provides about $40 billion for higher education including provisions for financial aid and student loan forgiveness. Here’s what college students and parents need to know about the bill, which President Biden is expected to sign into law this week.

This isn’t the first time federal funds have been allocated for higher education institutions and students seeking relief from the pandemic, but it is the largest allocation to date. In March 2020, the Coronavirus Aid, Relief, and Economic Security (Cares) Act established the Higher Education Emergency Relief Fund, and allocated about $14 billion for emergency higher education funding. In December, higher education institutions received an additional $23 billion through the Coronavirus Response and Relief Supplemental Appropriations (CRRSA) Act.

Now, institutions will receive about $40 billion. This amount is less than the $97 billion the American Council on Education estimated schools and students would need to recover from pandemic-related losses, but the higher education lobbying group praised the legislation as the “largest federal effort so far to assist students and families struggling to cope with lost jobs or reduced wages and colleges and universities facing precipitous declines in revenues and soaring new expenses.”

Half of the funding will go to emergency financial aid for students.

At least 50% of the total funds each institution receives must go directly to students for emergency financial aid.

When each institution receives the funding, it gets to decide which students receive aid. While some institutions might choose to give the majority of the aid to Pell Grant recipients, others might make it more broadly available.

But schools must also consider federal restrictions on the funding. When the first round of funding came out via the Cares Act, schools were restricted by “Title IV student aid under Section 484 of the Higher Education Act.” This meant students who received aid needed to meet certain criteria, such as having a valid Social Security number and having a high school diploma, GED or completion of high school in an approved home-school setting.

But for the December round of funding, which many colleges are still distributing, and the round of funding that was just approved, institutions are directed to give priority to students with exceptional financial needs.

However, it is still not clear whether noncitizens, such as international students or those in the Deferred Action for Childhood Arrivals (DACA) program, will qualify.

Students can use the funds from this legislation to cover any component of the cost of their attendance, as well as any emergency costs that have arisen due to the coronavirus, including tuition, food, housing, healthcare, mental healthcare and child care, says Megan Coval, the vice president of policy and federal relations at the National Association of Student Financial Aid Administrators.

Congress has passed the $1.9 trillion Covid-19 relief bill that provides an economic boost to Americans. WSJ’s Gerald F. Seib breaks down what’s in the bill and why it’s significant for the Biden administration. Photo illustration: Laura Kammermann

Students might have to complete an application to receive the funds.

How students will receive the funds will depend on the institution.

At some schools, under previous rounds of aid, administrators gave direct payments to students who qualified, such as those with Pell Grants, or those who had low expected family contributions based on their Free Application for Federal Student Aid, or Fafsa, forms. Other schools set up pools of funds that they distributed after reviewing student applications. “We did see a fair amount of schools that did a hybrid of both,” says Ms. Coval.

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Students will need to check with their individual schools to learn more about how funds will be distributed, says Ms. Coval. Additionally, some students should expect to wait a few weeks before their institutions determine how the money will be spent. “Where this gets difficult is, we don’t know right now if undocumented or DACA or international students can get those funds, so there are some schools that hope that’s the case, and they aren’t pushing all of their funds out yet,” she says. Ms. Coval said there isn’t yet written guidance from the U.S. Department of Education on whether these students qualify for the December round of funding, and she hopes guidance is issued in the next few weeks.

Additionally, as part of the legislation, the Education Department is directed to use $91 million to help students and borrowers navigate filling out federal financial-aid forms, as well as unemployment assistance and other benefits they might be eligible for due to the pandemic.

Student loan forgiveness is tax-free.

The stimulus legislation means any student debt forgiven after Dec. 31, 2020, and before Jan. 1, 2026, won’t be taxed. Federal law typically treats any forgiven debt as taxable income.

In the short term, the new provision will primarily affect borrowers who are on income-driven repayment plans. These are people whose monthly federal student loan payments are based on their incomes, and who pay back their loans over a period of 20 to 25 years. If after 20 to 25 years of payments, the borrower’s federal student loans aren’t fully repaid, any remaining balance is forgiven. Up until the legislation passed, the forgiven loan balance would also be taxed at the borrower’s normal income-tax rate.

Few people have qualified for forgiveness under these types of repayment programs because they haven’t been around long enough, says Mark Kantrowitz, an expert on student loans and financial aid.

Students who are claimed as dependents might be able to receive stimulus relief through their families.

Adult dependents were ineligible for prior rounds of payments, but are now included in the latest legislation. The latest payments total $1,400 per household member, including adults, children and adult dependents such as college students. The payment will go to the taxpayer, and not the student dependent.

But there are income limits. Individuals with adjusted gross income of $80,000, and heads of household with incomes of $120,000 and married couples with incomes of $160,000 will get nothing.

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