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Student loan forgiveness is now tax-free, thanks to a clause included in the $ 1.9 trillion federal coronavirus stimulus package that President Joe Biden signed on Thursday.
Previously, any student loan debt canceled by the government was considered taxable and charged at the borrower’s standard income tax rate.
Defenders and borrowers hope the move will remove an obstacle that prevents the president from canceling the debt.
Biden says he supports the forgiveness of $ 10,000 in student loans, but is under increasing pressure from members of his own party, defenders and borrowers to go further and cancel $ 50,000 per borrower.
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Before the bill was passed, any of the pardon plans would have hit borrowers with a large tax bill.
According to a rough estimate by higher education specialist Mark Kantrowitz, $ 10,000 in cancellation would result in an extra $ 2,000 in tax for the average borrower. If $ 50,000 per borrower were canceled, the average person would have to write a check for $ 10,000 to the IRS.
Covid’s relief bill ends this policy and any student debt forgiven will no longer have an impact on the borrower’s tax obligations. The provision will last until 2025, but it can be extended or become permanent.
“This will pave the way for President Biden to provide real relief to student borrowers, without fear of receiving a huge tax bill that they cannot pay,” said Ashley Harrington, federal defense director at the Center for Responsible Lending, in a statement.
What borrowers can save
There are approximately 45 million student loan borrowers in the United States
One third of these borrowers are enrolled in “income-based repayment plans”. These plans aim to make borrowers’ payments more accessible by limiting their monthly bills to a percentage of their discretionary income and canceling any remaining debt after 20 or 25 years. At that point, forgiven loans were treated as revenue and the IRS sent the borrower a form called 1099-C.
“It’s as if someone gives the debtor money to pay the debt,” said Kantrowitz.
Tax collection can be significant: say a borrower earns somewhere between $ 85,000 and $ 160,000, falling at a 24% tax rate. If they had $ 48,000 in student debt canceled by the government, they would potentially have to write a check for $ 11,520 to the IRS, according to an example provided by Kantrowitz.
Borrowers are now free from these accounts.
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