Expanding Income-Based Repayment To Solve The Student Loan Debt Crisis Could Create An Even Bigger Problem

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#DeferStudentLoanDebt? Doesn’t he really have the same ring, does it? Still, as the Biden administration inches closer to a decision On whether it will cancel trillions of dollars of student loan debt, many questions remain about how the plan will affect individuals with significant obligations.

While several prominent Democrats in Washington are advocating for President Biden to forgive $50,000 of student loan debt for each borrower, the president is considering several options. one that have a plan under consideration Which would allow more Americans to qualify for income-based repayment.

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Allowing more borrowers on this repayment schedule will undoubtedly help in the short term. Income-based repayment uses borrowers’ tax returns to calculate the minimum payment that they can reasonably afford given their financial situation. What’s more, provided the payments are made on time, the plans allow for loans to be forgiven after a period of 20 or 25 years. However, that remaining balance has the potential to plague borrowers with an entirely new tax burden, which could hasten the onset of an even bigger crisis.

Currently, thanks to a provision included in the $1.9 trillion federal coronavirus stimulus package that became law in March 2021, student loan forgiveness is tax-free. However, in the past, any student loan debt that was canceled by the government was considered taxable and taxed at the borrower’s ordinary income tax rate.

Consider the two numbers that are called for cancellation: $50,000 per borrower and $10,000 per borrower. rough estimate by higher education expert Mark KantrowitzOf course, canceling the $50,000 would have triggered an additional $10,000 in taxes for the average borrower. If $10,000 was canceled per borrower, the average person would have to write a check to the IRS for $2,000. That’s a huge savings on whatever amount the president decides to waive. But therein lies the nonsense: How long can debtors expect the forgiveness to remain tax-free?

Forgiveness of $10,000 would still leave about two-thirds of borrowers with student loan debt. In an effort to extend some goodwill to those with balances, the president may allow borrowers to qualify for income-based repayment, a secondary pillar of his plan. But will this open the door to another crisis?

As the law is currently written, student loan forgiveness is “permanently” tax-free. As any tax law abiding person can tell you, permanent isn’t always Meaning Permanent. Just take the Tax Cuts and Jobs Act of 2017, the most significant reform to the tax code in decades. One of the primary components of the law was that it Establish a limit for the amount of state and local taxes that taxpayers can deduct, Tax filers in states like New York, New Jersey, and Connecticut, which have been deducting more than $10,000 in property taxes for generations, learned the hard way how quickly permanence can become a past.

So it seems logical that, at some point, there will be a push – whether by rival lawmakers or loan officers – to make loan forgiveness taxable once again. After all, if there’s no incentive to pay anything more than the minimum on these income-based repayment plans—knowing that 20 consecutive years of on-time payments can keep a borrower’s balance at bay. Growth, Depending on the interest rate – why would someone pay more?

This is why people with student loan debt over $10,000 need to be both cautious and incredibly prudent about what lies ahead. If borrowers — especially those with higher interest rates — don’t allow for the possibility that the pardon may once again go tax-free, they may find themselves off guard when the target positions move. And if it does, it will not be calling debt service; That would be the IRS, and that’s a collector who wouldn’t look the other way on past due balances.

Credit: www.forbes.com /

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