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A significant provision preventing the possibility of forgiving any student loan has been included in the $ 1.9 trillion federal stimulus package that is making its way into Congress and is likely to be enacted into law.
Currently, any student loan debt canceled by the government can be considered taxable and charged at the normal rate of the borrower’s income tax.
For example, if someone earns $ 50,000 a year and charges a 22% tax rate and receives $ 30,000 in student loan forgiveness, they can receive a $ 6,600 bill from the IRS.
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Soon, borrowers may disregard these payments.
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 this point, your forgiven loans are treated as income and the IRS sends the borrower a form called 1099-C.
“It’s like someone giving money to the borrower to repay the debt,” said Mark Kantrowitz, a higher education expert.
The tax bill can be significant – let’s say a borrower earns between $ 85,000 and $ 160,000, down to a 24% tax rate. If they had a $ 48,000 student debt canceled by the government, they would have to write a $ 11,520 check to the IRS, according to an example provided by Kantrowitz.
The Student Loan Tax Relief Act, introduced by Senator Elizabeth Warren, D-Mass. And Senator Bob Menéndez, DN.J., who is now part of the incoming stimulus package, would end that policy. Any forgiven student debt would not affect the tax liability of the borrowers.
The provision would last until 2025, but could be expanded or made permanent.
The change would further affect borrowers in revenue-based return plans. Other student debt forgiveness plans, including one popular for public officials and another that cancels the debt of people with severe disabilities, are no longer subject to taxation.
A good sign of debt forgiveness?
Advocates also hope that making student loan cancellation tax-free will remove an obstacle in President Joe Biden’s forgiveness of student debt.
“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,” said Ashley Harrington, federal defense director of the Responsible Loan Center in a statement. week.
Critics of student loan forgiveness argue that it will fail to stimulate the economy, as college graduates tend to be higher winners who will spend their monthly payments and not spend more. Others say a debt jubilee is unfair to those who have already paid off their loans or never taken them out, even though they send the message that it’s okay for people to leave their debts.
Advocates, meanwhile, say student loan borrowers were already in crisis before the pandemic – with a third of borrowers in default or default – and that the pain has only worsened after a record year of unemployment. . They also point out that it is people of color who are suffering the brunt of the student loan crisis, and it is also black and Hispanic Americans who have suffered the most from the coronavirus pandemic.
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.
If that pardon were tax-free, the $ 10,000 cancellation would save the average borrower about $ 2,000 in taxes, according to an approximate Kantrowitz approximation. If $ 50,000 per borrower were canceled, the average person would avoid a $ 10,000 tax bill.