Some more good news about Student Loan Forgiveness

[BWdem4life]

Last edited Wed Aug 24, 2022, 05:22 PM - Edit history (1)

My first thought, after the initial good feelings about the loans being forgiven, was: What are the tax implications?

Usually when debt is forgiven, you have to pay income tax on the forgiven amount - it's treated as extra income, and can bump you into a higher tax bracket. Not a good thing to find out at the tax office, when you may be unprepared for a hefty amount owed to the IRS.

So I did a quick google search, and lo and behold:

Federal student loans forgiven under income-driven repayment (IDR) plans are typically treated as taxable income. Forgiveness under the plans is common because the borrower makes monthly payments based on their income, which may be less than the amount of interest accrued each month. The borrower’s loan balance under the plan may actually grow over time until the debt is forgiven, which usually occurs after 20 or 25 years of on-time payments.

While student loan forgiveness is generally included in taxable income, the current tax code contains a complicated patchwork of exceptions. The American Rescue Plan Act (ARPA) of 2021 temporarily exempted student loan forgiveness under IDR plans from federal taxation through 2025 under the rationale that tax burden arising from treating forgiven student debt as income partially undermines debt relief.

https://taxfoundation.org/student-loan-debt-forgiveness/

Good work, Biden administration!

[Johnny2X2X]

1. Outstanding find

I don't think people are fully grasping how progressive this plan is by Biden. The repayment options changing are bigger than the forgiveness and basically solve the crisis permantly.

[Hortensis]

3. That is good, thanks. And no doubt we intend to extend or

otherwise expand this before expiration.

[Amishman]

4. That is for IDR - Income Driven Repayment - and does NOT apply to what is being proposed

IDR plan related forgiveness requires ten or twenty years of minimum payments, and then the balance is forgiven if certain criteria is met.

This is not at all what has been proposed.

Unless tax laws are changed, or there is some other mechanism for exempting it that I don't know about, the loan forgiveness that is being proposed will count as a taxable event.