For the majority of federal student loan borrowers who have or would qualify for a discharge of their loans, President Joe Biden is proposing to make a temporary tax advantage permanent.
President Biden approved the $1.9 trillion pandemic-era stimulus plan known as the America Rescue Plan Act in 2021, which exempts the majority of forgiven student loan types from federal income taxes. However, it is only applicable to debts paid off between January 1, 2021, and December 31, 2025.
As part of the recently unveiled White House budget plan for Fiscal Year 2025, President Biden wants to permanently exclude student loan cancellations from federal taxes.
Student loan obligations forgiven under Total and Permanent Disability (TPD) and Income-Driven Repayment (IDR) programs would remain non-taxable if Congress approves the proposal.
Following a certain period of repayment—typically 20 years for undergraduate loans and 25 years for graduate school loans—borrowers may be eligible for an IDR plan to have any leftover debt waived.
In the meanwhile, anyone who can demonstrate that they suffer from a physical or mental impairment that substantially impairs their capacity to work both now and in the future are eligible for a TPD release.
Student loan debts forgiven via the Higher Education Act's "settlement and compromise" power, the IDR, and the TPD were taxable income prior to the COVID-19 pandemic.
Borrowers in these situations would have to submit a document 1099-C, a tax document that reports canceled debt of at least $600 as income for federal tax reasons.
The tax is imposed in the year of forgiveness at the federal income tax rate. For example, if a borrower is single and earns less than $35,000 year, they may be compelled to pay the IRS $1,200, which is equivalent to 12 percent of the $10,000 debt that was erased after 20 years of payments.
The IRS states that the amount of student loans forgiven as a result of modifications to the Public Service Loan Forgiveness (PSLF) program is not taxable.
After ten years of payments and employment in certain professions, the PSLF program permits those who work for the government and specific NGOs to have their outstanding debt erased.
A few states still see the forgiveness of student loans as taxable at the state level. Even though debt relief is tax-free at the federal level, borrowers in California, Indiana, Mississippi, North Carolina, and Wisconsin can nevertheless get a state tax charge.
Enactment of the White House budget proposal would apply the tax advantage not just to debts waived under the TPD and IDR programs, but also to sums waived under President Biden's recently developed student loan forgiveness scheme.
President Biden's original proposal to provide a general debt discharge for all borrowers who were negatively impacted financially by the COVID-19 outbreak was rejected by the U.S. Supreme Court this summer.
President Biden gave the Education Department the responsibility of creating a new plan based on the Higher Education Act's "settlement and compromise" power after the court's conservative majority decided that he had overreached his authority.
Although this plan B has a stronger legal foundation, it necessitates a more drawn-out and challenging procedure known as "negotiated rulemaking."
Four negotiated rulemaking sessions have been conducted by the Education Department so far to address issues including who will be eligible for the relief, how it will be implemented, and how much assistance they would get.
Later this year, the Education Department is anticipated to release draft regulations. The outcome of plan B, however, will depend on the results of the November presidential election.
It is still feasible for the government in office in 2025 to prolong or make permanent the tax advantage before it expires if Congress rejects the budget plan this year.
President Biden approved the $1.9 trillion pandemic-era stimulus plan known as the America Rescue Plan Act in 2021, which exempts the majority of forgiven student loan types from federal income taxes. However, it is only applicable to debts paid off between January 1, 2021, and December 31, 2025.
As part of the recently unveiled White House budget plan for Fiscal Year 2025, President Biden wants to permanently exclude student loan cancellations from federal taxes.
Student loan obligations forgiven under Total and Permanent Disability (TPD) and Income-Driven Repayment (IDR) programs would remain non-taxable if Congress approves the proposal.
Following a certain period of repayment—typically 20 years for undergraduate loans and 25 years for graduate school loans—borrowers may be eligible for an IDR plan to have any leftover debt waived.
In the meanwhile, anyone who can demonstrate that they suffer from a physical or mental impairment that substantially impairs their capacity to work both now and in the future are eligible for a TPD release.
Student loan debts forgiven via the Higher Education Act's "settlement and compromise" power, the IDR, and the TPD were taxable income prior to the COVID-19 pandemic.
Borrowers in these situations would have to submit a document 1099-C, a tax document that reports canceled debt of at least $600 as income for federal tax reasons.
The tax is imposed in the year of forgiveness at the federal income tax rate. For example, if a borrower is single and earns less than $35,000 year, they may be compelled to pay the IRS $1,200, which is equivalent to 12 percent of the $10,000 debt that was erased after 20 years of payments.
The IRS states that the amount of student loans forgiven as a result of modifications to the Public Service Loan Forgiveness (PSLF) program is not taxable.
After ten years of payments and employment in certain professions, the PSLF program permits those who work for the government and specific NGOs to have their outstanding debt erased.
A few states still see the forgiveness of student loans as taxable at the state level. Even though debt relief is tax-free at the federal level, borrowers in California, Indiana, Mississippi, North Carolina, and Wisconsin can nevertheless get a state tax charge.
Enactment of the White House budget proposal would apply the tax advantage not just to debts waived under the TPD and IDR programs, but also to sums waived under President Biden's recently developed student loan forgiveness scheme.
President Biden's original proposal to provide a general debt discharge for all borrowers who were negatively impacted financially by the COVID-19 outbreak was rejected by the U.S. Supreme Court this summer.
President Biden gave the Education Department the responsibility of creating a new plan based on the Higher Education Act's "settlement and compromise" power after the court's conservative majority decided that he had overreached his authority.
Although this plan B has a stronger legal foundation, it necessitates a more drawn-out and challenging procedure known as "negotiated rulemaking."
Four negotiated rulemaking sessions have been conducted by the Education Department so far to address issues including who will be eligible for the relief, how it will be implemented, and how much assistance they would get.
Later this year, the Education Department is anticipated to release draft regulations. The outcome of plan B, however, will depend on the results of the November presidential election.
It is still feasible for the government in office in 2025 to prolong or make permanent the tax advantage before it expires if Congress rejects the budget plan this year.
