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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 into law on Thursday.
Previously, any student loan debt canceled by the government was considered taxable and applied at the borrower’s normal income tax rate.
Advocates and borrowers hope the change will remove a roadblock in how the president pays off debt.
Biden says he supports $ 10,000 student loan forgiveness, but is under increasing pressure from members of his own party, advocates and borrowers to go further and write off $ 50,000 per borrower.
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Before the relief law was passed, any of the forgiveness plans would have hit borrowers with a large tax bill.
According to a rough estimate by higher education expert Mark Kantrowitz, $ 10,000 in cancellation would generate an additional $ 2,000 in taxes for the average borrower. If $ 50,000 per borrower were written off, the average person would have to write the IRS a check for $ 10,000.
The Covid relief bill ends this policy and any student debt forgiven will no longer affect the borrower’s tax liability. The provision will last until 2025, but could be extended or made 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 director of advocacy for the Center for Responsible Lending, in a statement. .
What Borrowers Can Save
There are about 45 million student loan borrowers in the US.
One third of these borrowers are enrolled in “income-based repayment plans.” These plans aim to make borrowers’ payments more affordable by limiting their monthly bills to a percentage of their discretionary income and paying off remaining debt after 20 or 25 years. At that time, their forgiven loans were treated as income and the IRS sent the borrower a form called 1099-C.
“It’s like someone giving the borrower money to pay off the debt,” Kantrowitz said.
The tax bill could be significant: Let’s say a borrower earns roughly $ 85,000 to $ 160,000, with a tax rate of 24%. If they had $ 48,000 in government-canceled student debt, they potentially would have had to write the IRS a check for $ 11,520, according to an example provided by Kantrowitz.
Borrowers are now exempt from these bills.
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