Biden’s $ 1.9 trillion ‘bailout’ eliminates taxes on student debt cancellation
The COVID-19 relief bill that President Joe Biden enacted removes a barrier to large-scale student debt cancellation – the tax treatment of any discharged debt.
Currently, borrowers whose student loans are discharged – with a few exceptions, including through the utility loan forgiveness – must pay a tax bill on the canceled debt. Under the $ 1.9 trillion relief bill known as the US bailout, any student debt written off until the end of 2025 would not count as income for tax purposes. .
The question of how forgiven student debt is taxed has been which threatens the debate around large-scale student debt cancellation. Senator Elizabeth Warren, a Democrat from Massachusetts, who along with Senator Bob Menendez, a Democrat from New Jersey, introduced the provision, said in a statement that the change “paves the way for President Biden to use his authority to overturn $ 50,000 in student debt ”.
“Now when student loan borrowers get relief, they won’t be burdened with thousands of dollars in unanticipated taxes,” Warren said in the statement.
Whether massive student debt cancellation will take place remains to be seen
It is still unclear whether policymakers will do some sort of mass cancellation of student loans, and if so, who will and how much debt they will pay. Warren and Chuck Schumer, the Senate Majority Leader, called on Biden to use his authority to write off up to $ 50,000 in student debt per borrower, although Biden was reluctant to pass the proposal, in some cases calling on Congress to provide $ 10,000 in students. loan relief.
The tax treatment of canceled debt was a major concern for critics of executive-backed student debt cancellation. The new COVID stimulus bill eliminates this worry.
Even without large-scale debt cancellation, the provision has the potential to help borrowers who may benefit from any loan relief they receive during the pandemic period, including from a private lender.
“There will be lenders who are more flexible,” during the pandemic period, said Persis Yu, director of the student loan assistance project at the National Consumer Law Center, “and we don’t want to prevent lenders from offering them. options available to borrowers – or having those options when offered ultimately are not beneficial – because of this tax consequence. ”
In addition, the changes made to the student loan system by the Biden administration could open up a new demographic of borrowers who would benefit from a change in the tax treatment of the remission. Administration officials have promised to simplify income-based repayment, the set of repayment plans borrowers can use to pay off debt as a percentage of their income.
Borrowers who use income-based repayment may have their balance canceled after at least 20 years of payments, but the debt paid is taxable. The bailout bill changes that, at least temporarily.
Fair 32 borrowers have so far had debts canceled under those plans, according to an analysis by the National Consumer Law Center. Yu said she hopes the administration will review these programs to see who is actually eligible for the aid but is not getting it. If, as a result of the review, more borrowers have their debt canceled, they won’t face a huge tax bill, thanks to the Rescue Plan package.
“There are a lot of people who should have been canceled,” Yu said. “If these programs worked, we would see a lot more people without student debt today.”