COVID tax break could open the door to student loan forgiveness

0
43


The tax break for college debt relief in the COVID-19 relief The package signed by President Joe Biden last week removed a potential obstacle to student loan debt relief: taxes.

The provision does not take into account debts that were waived between December 31, 2020 and January 1, 2026 as income. As part of one of the existing award programs (income-based repayment), the amount awarded is reported to the IRS as income and taxed according to the information provided by the borrower current tax class.

Debt relief would not benefit borrowers if it resulted in an prohibitive tax burden, says Douglas Webber, associate professor of economics at Temple University.

“I see this as one step closer to eliminating what would be not only a major potential disadvantage, but also a major public relations problem,” said Webber.

The tax measure was carried over from the Student Loan Tax Relief Act directed by Sens. Bob Menendez, DN.J., and Elizabeth Warren, D-Mass. On March 6, Warren tweeted, “This paves the way for President Biden to #CancelStudentDebt without burdening student borrowers with thousands of dollars in unexpected taxes. “

Experts say the tax break could do just that.

“Given the context and all of the lending debates, I think it’s likely that this is a nod by Congress to open that door,” said Megan Coval, vice president of politics and federal relations for the National Association of Student Financial Aid administrators.

Artem Gulish, senior policy strategist at Georgetown University Center for Education and Labor, says the aid package was just a start for student loan borrowers.

“This is the first thing the Biden government does. There is still the potential for forgiveness, ”says Gulish.

However, there is still no legislation or executive order that can answer the big questions of “if,” “how much,” or “when” forgiveness.

What your bill could look like without a tax break

Imagine if the stimulus package does not contain any tax breaks. Also, let’s look optimistically into a crystal ball and say that at some point this year you were forgiven $ 10,000 student loan debt. Your income is $ 68,000 (the approximate median in the US), which means you fall into the 22% tax bracket. If you paid tax on 2021 income the next year, the debt forgiven would be taxed at 22% and you would owe $ 2,200 on it.

Without a tax break, forgiveness could have pushed you into a higher tax bracket. For example, let’s say you made $ 85,525 – the high end of the 22% tax bracket – and gave away $ 10,000, which took you to the next tier. Since this is a progressive tax system, you would end up paying 22% of your income, but 24% of the amount that moves to the higher tax bracket (in this example, $ 2,400).

There are additional sacrifices on the lower end of the income spectrum, says Erica Blom, a senior research associate at the Urban Institute, a nonprofit research organization. Moving to a different tax class can lead to the loss of credits, e.g. B. a tax credit for earned income or a tax credit for children.

“That could have been as bad or worse than asking someone to pay an additional $ 1,000 in taxes,” says Blom.

Where forgiveness is for student loans

Democratic lawmakers, a group of 17 attorneys general, and advocates of consumer rights have all called for it Cancel Biden Up to $ 50,000 in federal student loans by executive order.

The president has said he is backing $ 10,000 in lump sum forgiveness for federal student loan borrowers through actions by Congress. During a CNN town hall on Feb. 16, he said he did not support $ 50,000 forgiveness.

Biden and his team have questioned whether he has the authority to ask the Department of Education to cancel debt through executive action. Proponents argue that a president has this authority under the Higher Education Act. However, the Department of Education issued a legal memo in January stating that its secretary did not have the authority to forgive.

The 42.9 million federal student loan borrowers who collectively owe the federal government $ 1.57 trillion benefit from blanket forgiveness. According to a nerd wallet, forgiving $ 10,000 would completely wipe out the debt of 15 million student loan borrowers Analysis of federal student loan data.

Neither of the two award proposals would likely benefit borrowers on private student loans or those on commercially held federal debt loans that were removed from previous relief packages. However, the debt relief tax relief could benefit private student loan borrowers whose debts are settled through bankruptcy.

In the meantime, federal borrowers are on an interest-free payment hiatus that began on March 13, 2020 and extends through the end of September.

Existing allocation plans and taxes

Although debt relief programs already exist, the success rates and tax implications have varied. Public Service Loan Forgiveness offers tax-free debt relief for approved borrowers (only 2.2% of applicants so far, according to federal data). Loans made for repayment under borrower defense – used when you were defrauded by your school – are not taxed. And the forgiveness of disabilities is also not considered taxable income.

Forgiveness is usually taxed for those on an income-based repayment plan that puts payments on a portion of your income and forgives after 20 or 25 years of debt. To date, only 32 borrowers have received forgiveness under these repayment programs. This is based on data obtained from the National Consumer Law Center in March 2021.

Most borrowers currently on an income-based repayment plan, however, will not be able to benefit from the forgiveness until 2035 at the earliest – long after the expiration date of the tax-free provision in the new relief package on January 1, 2026.

LEAVE A REPLY

Please enter your comment!
Please enter your name here