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The pardon of student loans is now tax-exempt, thanks to a $ 1.9 trillion federal coronavirus stimulus package signed by President Joe Biden on Thursday.
In the past, any student loan debt canceled by the government was considered taxable and levied at the debtor’s normal income tax rate.
Lawyers and borrowers hope the change will remove an obstacle to the president’s debt cancellation.
Biden says he supports $ 10,000 in forgiving student loans, but is under increasing pressure from his party members, lawyers and debtors to go further and cancel $ 50,000 for each borrower.
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Prior to the passage of the bill, any of the pardon plans would have hit borrowers with a high tax bill.
According to a rough estimate by higher education expert Mark Kantrowitz, canceling $ 10,000 would generate an additional $ 2,000 tax for the average borrower. If $ 50,000 per debtor were canceled, the average person would have to write an IRS check for $ 10,000.
The Covid exemption bill puts an end to this policy and any forgiven student debt will no longer have an impact on a borrower’s tax liability. The provision will last until 2025, but could be extended or become permanent.
“This will pave the way for President Biden to provide real relief to borrowed students without fear of receiving a huge tax bill that they cannot afford,” said Ashley Harrington, federal director of advocacy at the Center for responsible loans, in a statement.
What should borrowers save?
There are about 45 million student loans in the United States
One third of these borrowers are enrolled in “income-based repayment plans”. These plans aim to make lenders’ payments more affordable by capping monthly bills at a percentage of their discretionary income and canceling any 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 money to the borrower to repay the debt,” Kantrowitz said.
The tax bill could be significant: suppose a borrower earns somewhere between $ 85,000 and $ 160,000, down to a 24% tax rate. If he had $ 48,000 students canceled by the government, the IRS would have had to write a check for $ 11,520, according to an example provided by Kantrowitz.
Borrowers are now disappointed with these bills.
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