Ungureanu Vadim | EyeEm | Getty images
Student loan forgiveness is now tax-free, thanks to a provision included in the federal $ 1.9 trillion coronavirus stimulus package signed by President Joe Biden by law on Thursday.
Previously, any student loan canceled by the government was considered taxable and charged at the borrower’s normal income tax rate.
Proponents and borrowers hope the change will remove an obstacle to the president’s forgiveness of the debt.
Biden says he supports $ 10,000 in student loan forgiveness, but he is under increasing pressure from members of his own party, attorneys and borrowers to go ahead and cancel $ 50,000 per borrower.
More from Personal Finance:
American women are burned out. Here’s how to deal with it
This is what employees miss most about office life
Covid’s long haulers also face lasting financial consequences
Before the bill passed, both plans of forgiveness 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 yield an additional $ 2,000 in taxes for the average borrower. If $ 50,000 were canceled per borrower, the average person would have to write the IRS a check for $ 10,000.
The Covid Waiver Act puts an end to this policy, and any student debt waived no longer affects a borrower’s tax liability. The provision will run through 2025, but can be extended or become permanent.
“This will pave the way for President Biden to provide real help to student borrowers without fear of facing a massive tax bill they cannot afford,” said Ashley Harrington, federal advocacy director at the Center for Responsible Lending. in a statement.
Which borrowers can save
There are approximately 45 million student loan borrowers in the US.
One-third of these borrowers are enrolled in “means-tested repayment plans”. These plans aim to make borrowers’ payments more affordable by limiting their monthly bills to a percentage of their discretionary income and by canceling their remaining debts after 20 or 25 years. At that point, their forgiven loans were treated as income, and the IRS sent the borrower a form called 1099-C.
“It’s as if someone gave money to the borrower to pay back the debt,” Kantrowitz said.
The tax bill can be significant: Suppose a borrower earns anywhere from $ 85,000 to $ 160,000, with a tax rate of 24%. If they had forgiven $ 48,000 in student debt by the government, they may have had to issue the IRS with a check for $ 11,520, according to an example from Kantrowitz.
Borrowers are now off the hook of these accounts.
Have you recently applied for rental assistance? If you are willing to discuss your experience for a story, please email me at [email protected]