Is There a Tax on Forgiven Student Loans? Understand New Changes in Effects
Americans won’t have to pay taxes on student loan forgiveness from 2021 to 2025 as part of the $1.9 trillion federal stimulus package signed into law by Joe Biden in March 2021.
Advocates of student loan relief were delighted with that provision, Marketrealist reported.
So congrats if you have had your student loans forgiven! Or if you’ve received forgiveness since 2021, congratulations!
“We applaud lawmakers for including this measure for student loan borrowers in President Biden’s rescue plan,” said Ashley Harrington, Center for Responsible Lending’s federal advocacy director and senior counsel.
Due to Last Year’s American Rescue Plan, Student Loans are No Longer Taxable
U.S. senators Elizabeth Warren (D-Mass.) and Bob Menendez (D-N.J.) got the ball rolling earlier that month when they introduced S496, the Student Loan Tax Relief Act, which was then incorporated into H.R.1319, the American Rescue Plan Act of 2021.
Section 9675 of that act “modifies the tax treatment of income attributable to the forgiveness of certain student loan indebtedness incurred between 2021 and 2026,” as the U.S. Congress’s summary stated.
“It excludes from student gross income, for income tax purposes, income from the discharge of student loans for postsecondary education expenses, private education loans, and loans from certain tax-exempt educational organizations.”
This provision, according to Warren and Menendez, “exclude[s] from income any student loan debt that is modified or discharged beginning December 31, 2020, until January 1, 2026, including private and institutional loans.”
The senators also noted that the average student with $50,000 of income would save $2,200 in taxes for every $10,000 of forgiven student loans if the changes were made.
New Changes Enable Biden to Effortlessly Cancel Student Loans
Warren and Menendez also pointed out that the provision would allow Biden to cancel, at least, $50,000 in federal student loans, a cause behind which both senators and activists have rallied lately.
Moreover, Harrington noted in Warren and Menendez’s press release that the American Rescue Plan Act’s student loan forgiveness provision “will pave the way for President Biden to provide real relief to student borrowers without fearing they’ll receive a huge tax bill they cannot afford. This especially benefits low-income borrowers and borrowers of color who are disproportionately burdened by student debt and the negative impacts of the current health and economic crisis.”
“With this obstacle removed, President Biden should turn toward providing across-the-board student debt cancellation of $50K per borrower. By doing so, he would wipe out the debt of 75 percent of federal student loan borrowers and provide a desperately needed economic boost that will benefit everyone,” Harrington added.