About a third of the 45 million student loan borrowers in the United States are enrolled in “income-tested repayment plans,” which cap monthly payments at a portion of discretionary income, and which ultimately nullify everything. unpaid balance after twenty years. .
For the IRS, the outstanding loan balance was considered income, and the agency notifies the borrower by submitting Form 1099-C.
And the amount of the tax bill can be shocking.
By previous standards, a person earning $ 50,000 in annual salary and paying 22% in taxes would face a potential tax bill of $ 6,600 if the person received $ 30,000 in student loan cancellation, according to CNBC.
For a borrower earning between $ 85,000 and $ 160,000 at a 24% tax rate, $ 48,000 in student debt cancellation would equate to a tax bill of $ 11,520, according to higher education expert Mark Kantrowitz.
“It’s like someone is giving the borrower money to pay off the debt,” Kantrowitz said, according to CNBC.
The Student Loan Tax Relief Act, sponsored by Democratic Senator Elizabeth Warren of Massachusetts and Bob Menendez of New Jersey, ended the policy of taxing this type of loan forgiveness until at least 2025, with the possibility of becoming a permanent law thereafter.
Student debt cancellation plans for those entering public service and for those with severe disabilities are already tax-free.
Biden has previously said he supports the idea of forgiving $ 10,000 per borrower, but has also expressed reservations about doing so unilaterally through executive action.
The president also said he would support the creation of a free community college and allowing families earning $ 125,000 or less to send their children to public schools for free. He also said he supported the elimination of interest payments and the expansion of debt relief programs for Americans who take public service jobs, such as teaching.
Biden, however, stopped short of saying he would sign an executive order canceling $ 50,000 in student loan debt for millions of Americans as Congressional Democrats continue to pressure the White House for further relief. for families struggling amid the coronavirus pandemic.
The resolution calling for $ 50,000 debt relief was introduced in February by Warren and Senate Majority Leader Chuck Schumer of New York.
Such a move would have cost about $ 800 billion and freed 36 million Americans from debt, according to reports.
The Higher Education Act 1965 allows the United States Secretary of Education to cancel student loans, meaning Biden could order the move, according to Warren and Schumer’s disposition. However, Biden had no appetite for such a one-sided move given the hundreds of billions of dollars at stake that would have to be wiped off the books at the same time for nearly 40 million people.
“Canceling student loan debt is the most effective executive action President Biden can take to improve the economic outlook for tens of millions of young Americans,” Warren said recently.
All federally guaranteed student loans have been forbidden throughout the pandemic, and Biden has extended the break in payments and interest until October 1.
Supporters of the loan cancellation plan say it would trigger a large chunk of the economy, including new businesses, consumer spending, retirement savings, home buying and others sectors. Critics, however, say the move would bring only a slight increase in economic activity to GDP. Republicans are said to have opposed this decision.
The White House continued to report that Congress should pass legislation to accomplish this, as student loan matters typically fall under federal spending set by Congress.