Student Loan Forgiveness and Tax Implications: What You Need to Know
U.S. President Joe Biden recently spoke at the Pieper-Hillside Boys & Girls Club in Milwaukee, Wisconsin, addressing the issue of student loan forgiveness. This topic has been a hot-button issue for years, with many borrowers feeling the burden of their debt.
Before a Covid-era change, any student loan debt canceled by the government was considered taxable and levied at the borrower’s normal income tax rate. This meant that borrowers could face a hefty federal tax bill depending on their remaining balance and income level.
According to higher education expert Mark Kantrowitz, a borrower with a $10,000 remaining balance after 20 or 25 years of payments could owe the IRS as much as $1,200. However, depending on their income and circumstances, their federal tax bill could be significantly higher.
In addition to federal taxes, borrowers could also owe state taxes on the forgiven debt. This could add to the financial burden for many borrowers who are already struggling to make ends meet.
Many student loan borrowers who receive forgiveness may not be able to afford a tax bill. Kantrowitz notes that these borrowers often have had low incomes for years and may not have the assets to cover a significant tax liability. Signing up for a payment plan with the IRS could mean simply swapping education debt for tax debt.
The tax implications of forgiven student debt could become even more important as the Biden administration unveils its revised student loan forgiveness plan, known as “Plan B.” The Supreme Court recently struck down the administration’s first attempt to forgive student debt, leaving many borrowers in limbo.
Regardless of federal policy changes, borrowers could still face state taxes on their forgiven education loans. This adds another layer of complexity to the already complicated issue of student loan forgiveness.
In conclusion, understanding the tax implications of student loan forgiveness is crucial for borrowers as they navigate their financial future. Stay informed and stay ahead of any changes that could impact your student loan debt.
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