Ungureanu Vadim | EyeEm | Getty Images
Student loan forgiveness is now tax-free, thanks to a provision included in the $ 1.9 trillion federal coronavirus stimulus package that President Joe Biden signed Thursday.
Formerly, any student loan debt canceled by the government was considered taxable and was charged at the normal rate of the borrower’s income tax.
Advocates and borrowers hope the change will remove an obstacle in the debt cancellation by the president.
Biden says he supports $ 10,000 in student loan forgiveness, but that he is pressuring members of his own party, advocates and borrowers to go further and cancel $ 50,000 per borrower.
More information on personal finance:
U.S. women are burned. Here’s how to deal with it
This is what office life workers most miss
Covid “long haulers” also have a lasting financial impact
Before the relief bill was approved, any forgiveness plan would have affected the borrowers with a large tax bill.
According to a rough estimate by higher education expert Mark Kantrowitz, the $ 10,000 cancellation would result in an additional $ 2,000 tax for the average borrower. If $ 50,000 per borrower were canceled, the average person would have to write a $ 10,000 check to the IRS.
Covid’s relief bill puts an end to this policy and any debt forgiven by students will no longer affect the borrower’s tax liability. The provision will last until 2025, but could be expanded or made permanent.
“This will pave the way for President Biden to provide real relief to student borrowers without fear that they will receive a huge tax bill that they cannot pay,” Ashley Harrington, federal director of defense for the Responsible Loan Center, said in a statement.
What borrowers can save
There are about 45 million student loan borrowers in the United States
One-third of these borrowers are enrolled in “income-based return plans.” These plans aim to make borrowers ’payments more affordable, limiting their monthly bills to a percentage of their discretionary income and canceling any of their remaining debts after 20 or 25 years. At that time, his forgiven loans were treated as income and the IRS sent the borrower a form called 1099-C.
“It’s like someone giving money to the borrower to repay the debt,” Kantrowitz said.
The tax bill could be significant – let’s say a borrower earns about $ 85,000 to $ 160,000, falling to a 24% tax rate. If governments had canceled the $ 48,000 student debt, they should have written an IRS with a check for $ 11,520, according to an example from Kantrowitz.
Borrowers are now safe from these notes.
Have you recently applied for rental assistance? If you are willing to comment on your experience for a story, email me at [email protected]