Included in the $ 1.9 trillion stimulus package is a provision that makes forgiven student debt tax-free. The pressure is mounting for President Joe Biden to cancel student debt, but it is also a big problem for many borrowers regardless.
The provision, added to the Covid-19 relief bill by Senate Democrats and championed by Senators Bob Menendez (D-NJ) and Elizabeth Warren (D-MA), says that anyone whose student loans are canceled until 2025 you will not face taxes. Consequences. Debt cancellation is generally treated as taxable income, so without this, if someone were to forgive some or all of their student debt, it would be accompanied by a tax bill.
While student debt forgiveness used to be a fairly fringe idea, it has become much more common in recent years as student debt in America has grown. Currently, some 45 million borrowers owe $ 1.7 trillion in student loans.
Biden has backed Congress with the forgiveness of $ 10,000 in student loan debt per individual. However, Senate Majority Leader Chuck Schumer, Warren, and Progressive Representatives Ayanna Pressley (D-MA), Ilhan Omar (D-MN), Alma Adams (D-NC), and Maxine Waters (D-CA) they have urged the president to cancel $ 50,000 using executive action. Biden has said that he does not believe he has the authority to cancel student debt.
A big question in the background has been whether, if any forgiveness were to occur, people would face taxes. The stimulus package removes that obstacle.
While the political impetus to include this tax provision in the relief bill may have been a broad-based waiver, this is a solution that many policy experts have long been advocating for and believe should be made permanent. Many student loan borrowers have income-based repayment plans, in which they make payments on their loans based on their income, and then, after 20 or 25 years, those loans are forgiven. Not many borrowers have reached that 20- or 25-year limit yet, but when they do, without the forgiveness being tax-free, they will have to pay taxes.
“Primarily this was aimed at making a solution that was fundamentally aimed at breaking down that potential barrier to administrative action on a broader debt cancellation … but it has side effects that are important,” said Jessica Thompson, associate vice president of the Institute for College. Access and success. “It is the correct policy.”
The current tax treatment of student loan forgiveness really doesn’t make sense
The tax liability for the forgiveness of student debt has been determined in an uncomfortable and uneven way. In some circumstances, the IRS considers forgiven loans to be taxable income; in others, no.
Loans forgiven under the public service loan forgiveness program, which forgives debts after people make 10 years of payments while working in certain public service positions, are not considered taxable. However, loans forgiven under an income-based repayment are. Not many people have qualified for forgiveness under those types of programs yet, because the programs haven’t been around long enough, but as more people begin to qualify, the tax problem looms.
“We’re still in the beginning of people going into that forgiveness period,” Thompson said. “But now there are more than 8 million people on these plans, so that number is just going to grow and grow and grow. We’re going to start looking at examples of people receiving tax bills. “
It’s not hard to see why that would be a problem: Many of the people who spend two decades repaying loans don’t have high incomes. “These are people whose balances have been growing because they aren’t even making enough to cover their interest payments,” Thompson said.
The Obama and Trump administrations found ways to ensure that canceled loans for people who attended colleges that committed fraud or closed were not taxable. The Biden administration would likely have taken a similar action, but now with the stimulus bill, this makes the fiscal guidance much clearer.
The new proposed rule builds on a tax provision included in the 2017 tax bill passed by Republicans, which removed the tax liability for student debt forgiven for disability or death. That, too, expires in late 2025. Many experts hope that a precedent will be set for all student loan forgiveness to be tax-free to become permanent law.
This removes an obstacle and gives Biden a boost
Before the fiscal correction, some experts believed that the federal government could find some solutions to make the forgiveness tax-free if it wanted to, although there was little general agreement on the matter. Now, Democrats have closed this part of the broader debate on student debt.
President Biden has insisted that he is not interested in paying off student debt on his own through executive action and would like Congress to forgive $ 10,000 of debt. If Congress acted, this new provision would apply. But many Democrats are also using it to urge Biden to act on his own and cancel until $ 50,000 in student loans.
Both Menéndez and Warren made it clear after the Covid-19 relief bill was passed that the point is to pave the way for Biden to take action.
3 / Just look at the math. This is a huge win for the millions of Americans burdened with student loan debt – NO AMAZING TAX BILLS on forgiven college loans!
– Senator Bob Menendez (@SenatorMenendez) March 6, 2021
I am happy that my account with @SenatorMenendez making any student loan forgiveness tax-free was included in the COVID relief bill. This paves the way for President Biden #CancelStudentDebt without burdening student borrowers with thousands of dollars in windfall taxes.
– Elizabeth Warren (@SenWarren) March 6, 2021
The debate over student debt forgiveness is not going away, and the pressure on the White House to do something is mounting.