President Plans to Shield Forgiven Student Loan Debt from Tax Consequences

The current administration has forgiven more than 16 billion dollars in student loans. However, it turns out that there can be some unintended tax consequences as well.

To date, any large amount of debt forgiven or canceled by the Internal Revenue Service, such as tuition credits, student loans, or tuition gratuities, is considered income. In such cases, you are taxed based on the income rate corresponding to the funds regardless of whether they were ever in your possession.

According to Newsbreak, as proposed by President Biden, the latest bill will protect borrowers from what’s known as a tax bomb, which can dramatically increase the amount of taxes due or eliminate one’s refund altogether, causing additional debt.

An additional $10,000 in perceived income can result in a $50,000 cancellation of tax debt for a married couple earning $100,000 per year.

The Public Service Loan Forgiveness and Teacher Loan Forgiveness programs may not count towards federal income-based repayment plans until 2025, but this does not protect borrowers who use these programs.

If the plan passes, student loan forgiveness would be permanently exempt from taxation. The latest round of extensions expire on May 1st, so most borrowers are enjoying a pause in payments. Talks of an additional extension and other possible relief actions are being contemplated, however, there haven’t been any official rules that have been set in stone.
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