Biden’s New Student Loan Forgiveness Changes May Wind Up Costing Some Borrowers

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The Biden administration is in the process of implementing a significant new federal student loan forgiveness initiative. These programs could eventually help millions of borrowers get closer to canceling their student loans.

But depending on the specific schedule and the exact timing of that loan forgiveness, some borrowers may be hit by a surprising penalty: additional taxes.

Biden makes major changes to major student loan forgiveness and repayment programs

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In April, the Biden administration announced historic reforms to federal student loan income-driven repayment (IDR) programs, including income-based repayment (IBR), modified pay as you earn (REPAYE), and other plans. IDR plans allow federal student loan borrowers to make payments based on their income and family size. After 20 or 25 years in the program (depending on the specific plan), any balance can be forgiven.

IDR plans have also been an essential element of the Public Service Loan Forgiveness (PSLF) program, which allows borrowers to eliminate federal student loan debt in as little as 10 years if they work full-time careers for government agencies or non-profit organizations. work in. Last October, the Biden administration announced sweeping, temporary changes to the PSLF program, as well as, what it called a “limited PSLF waiver” initiative.

Taken together, the limited PSLF waiver program and the temporary change to the IDR, which the administration is calling an “IDR adjustment,” will allow the Department of Education to calculate several more loan periods for student loan forgiveness under both the IDR and PSLF, Including:

  • any previous time period in which the borrower was in “repayment status”, regardless of the type of repayment plan or the specifics of a particular payment;
  • 12 or more months of continuous tolerability, or 36 or more months of cumulative tolerability;
  • any previous month spent in deferment (with the exception of in-school deferment) prior to 2013; And
  • Repayment period before debt consolidation.

According to the Department of Education, “Any borrower who has accumulated time in repayment of at least 20 or 25 years will receive an automatic waiver, even if you are not currently on an IDR plan.” The department estimates that 40,000 borrowers could have their loans forgiven very quickly, while an additional millions of borrowers could eventually advance their progress toward student loan forgiveness.

Student loan forgiveness may be taxed on some borrowers

Generally, whenever a loan (including student loans) is reduced, forgiven, forgiven, or canceled, the debtor or borrower pays tax on that canceled balance. may have to. The lender will send the borrower a 1099-C form during tax time, showing the amount of the loan cancellation. The borrower may then have to report the canceled debt as “income” on his tax return, which can lead to higher taxes. When a large amount of the loan is canceled, it can potentially result in a significant tax liability for the borrower.

Some types of student loan forgiveness are not taxable. Public Service Loan Forgiveness (PSLF) is not taxable under federal law, and the same holds true for relief under the limited PSLF exemption. So borrowers who get student loan forgiveness under that program won’t have to worry about federal taxation.

However, loan waiver under IDR is more complicated. This type of student loan forgiveness is generally taxable. However, the American Rescue Plan Act — a stimulus bill passed by Congress and signed by President Biden last year — temporarily exempts all federal student loan forgiveness from federal taxation until the end of 2025. This means that for borrowers expecting immediate or imminent student loan forgiveness as a result of the new IDR adjustment, they will not have to pay any federal income taxes.

“The american rescue planning act Includes provision to temporarily modify tax treatment of holiday student loan debt, says Department of Education published guidance, “Specifically, the law excludes gross income qualified student loans issued between December 31, 2020 and January 1, 2026. During this period, the amount of forgiven student loan debt will not be subject to taxation.”

But borrowers who have been able to achieve years of progress toward loan forgiveness under IDR adjustments, but still have some time to repay, could face an unexpected tax bill much earlier than they anticipated. For example, a borrower over a period of 25 years who moves from five years of progress towards IDR loan forgiveness to 21 years of progress towards loan forgiveness under IDR adjustment, will have to pay his loan for another 20 years instead of only. Can be forgiven in four years. , But that loan forgiveness would fall outside the tax exemption window under the American Rescue Plan Act — potentially subjecting them to significant tax liability in 2026.

Student loan forgiveness of $100,000 can result in a $25,000 to $30,000 tax bill, depending on the borrower’s federal tax bracket and other possible tax exemptions or deductions.

Biden pushes Congress to make student loan forgiveness tax exemption permanent

There are some exemptions under the current tax code that may allow some borrowers to face student loan forgiveness as soon as possible under the IDR to avoid taxation. For example, a borrower who has gone bankrupt when a loan is canceled (meaning the value of their loan exceeds the value of their assets) may be able to reduce or eliminate the resulting tax bill. could. But it will depend on the specific financial circumstances of the borrower.

In March, President Biden included a provision in his budget proposal that would make federal student loan forgiveness permanently exempt from taxation under the IDR. But it will ultimately be up to Congress to pass it, and it is too early to know whether Congress will permanently include the issue of student loan forgiveness taxation in the final budget legislation.

further student loan reading

If Biden Implements Comprehensive Student Loan Forgiveness, It Could Look Like This

Student loan payment break: Biden official says repayments will resume ‘at some point’ – here’s what it could mean

Want Student Loan Forgiveness? To qualify, borrowers may first need to

Who Qualifies for Student Loan Forgiveness Under Biden’s Huge New Expansion of Income-Based Repayment

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