Student loan issuance is now tax-free. Is the cancellation coming?

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Student loan issuance is now tax-free thanks to a provision included in the $ 1.9 trillion coronavirus stimulus package that President Joe Biden put into law Thursday.

Previously, any student loan debt canceled by the government was considered taxable and charged at the borrower’s normal income tax rate.

Lawyers and borrowers hope the change will remove an obstacle to the president’s debt relief.

Biden says he supports student loan forgiveness of $ 10,000 but is under increasing pressure from members of his own party, lawyers, and borrowers to go further and cancel $ 50,000 per borrower.

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Before the relief bill was passed, any forgiveness plan would have hit borrowers with a huge tax bill.

According to a rough estimate by college graduate Mark Kantrowitz, $ 10,000 cancellations would trigger an additional $ 2,000 in taxes for the average borrower. If $ 50,000 per borrower were to be canceled, the average person would have to write a check to the IRS for $ 10,000.

The Covid Relief Act ends this policy, and student debts canceled will no longer affect a borrower’s tax liability. The provision will last until 2025 but could be extended or permanent.

“This will pave the way for President Biden to bring real relief to student borrowers without fear of receiving a huge tax bill they cannot afford,” Ashley Harrington, federal prosecutor at the Center for Responsible Lending, said in a statement .

What Borrowers Avail To Save

There are around 45 million student loan borrowers in the US

A third of these borrowers are enrolled in “income-based repayment plans”. These plans aim to make borrower payments more affordable by capping their monthly bills to a percentage of their discretionary income and reducing their remaining debt after 20 or 25 years. At that point, their issued loans were treated as income and the IRS sent the borrower a form called 1099-C.

“It’s like someone gave the borrower money to repay the debt,” said Kantrowitz.

The tax burden could be substantial: let’s say a borrower makes approximately $ 85,000 to $ 160,000 at a tax rate of 24%. If the government had canceled $ 48,000 in debt from the government, they might have had to write a check to the IRS for $ 11,520, as demonstrated by an example from Kantrowitz.

The borrowers are now off those bills.

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