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Student loan forgiveness is now tax-free, thanks to a provision included in the $ 1.9 billion federal coronavirus stimulus package signed by President Joe Biden on Thursday.
Previously, any student loan debt canceled by the government was considered taxable and charged at the normal tax rate of the borrower.
Advocates and lenders hope the change will remove an obstacle in the way of the president’s cancellation.
Biden says he supports $ 10,000 in forgiveness for student loans, but is under increasing pressure from members of his own party, lawyers and lenders to go ahead and cancel $ 50,000 per borrower.
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Before the relief bill was passed, the forgiveness plan would have hit borrowers with a big tax bill.
According to a rough estimate by higher education expert Mark Kantrowitz, the $ 10,000 cancellation would result in an additional $ 2,000 tax for the average borrower. If $ 50,000 per borrower is canceled, the average person will have to write a $ 10,000 check to the IRS.
The Covid Bill terminates this policy, and any student debt forgiven will no longer affect a borrower’s tax liability. The provision will last until 2025, but it can be extended or become permanent.
“This will pave the way for President Biden to provide real relief to student loans without fear of receiving a huge tax bill that they cannot afford,” he said. Ashley Harrington, federal attorney general at the Center for Responsible Lending, in a statement.
What borrowers can save
There are approximately 45 million student loan borrowers in the US
A third of these lenders are subscribed to “income-driven repayment plans. “These plans aim to make borrowers’ payments more affordable by limiting their monthly bills to a percentage of their discretionary income and canceling any of their remaining debt after 20 years or 25 years. At that point, their defaulted loans are treated as income and the IRS has a form called a 1099-C.
“It’s like someone gave money to the borrower to repay the debt,” Kantrowitz said.
The tax bill can be significant: let’s say a borrower earns about $ 85,000 to $ 160,000 and drops at a 24% tax rate. If they had $ 48,000 in student debt canceled by the government, they might have to write a $ 11,520 check to the IRS, according to an example by Kantrowitz.
Borrowers are now off the hook of these accounts.
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