Student Loan Forgiveness Taxes Could Be Waived as Part of Stimulus
Student loan forgiveness has been a hot button of contention in the $1.9 trillion stimulus package endlessly circulating through Congress. In the latest development, Senate Democrats have proposed that forgiven student loan debt will no longer be considered taxable income, CNBC reports. Currently, forgiven student loan debt is taxed at the normal income rate based on the borrower’s tax bracket.
Of the 45 million student loan debtors in the U.S. today, approximately one-third are using income-driven repayment plans to make a dent in their debt. Borrowers pay a certain percentage of their income after living expenses and then the rest of the debt is forgiven. But the forgiven debt can lead to hefty tax bills, experts say. Education expert Mark Kantrowitz shares an example with CNBC, where a borrower who falls into the 24% tax bracket and has $48,000 in student loan debt forgiven could owe the IRS up to $11,520.
Likewise, lower-income borrowers may owe less based on their tax bracket, but it could be harder for them to come up with the money in a timely manner.
President Joe Biden has stated he supports up to $10,000 in student loan forgiveness, but some Democrats are pushing for forgiveness of up to $50,000. Cancelled loans of that proportion could lead to $10,000 or more in taxes for some borrowers if they don’t come in conjunction with waiving the taxes on cancelled loans.
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