Plan to write off up to $ 50,000 in student loan debt could be accompanied by a tax bomb
If you have student loans, you could face a big tax bill at the end of the year if the Biden administration adopts Schumer’s call for a $ 50,000 student loan forgiveness. (iStock)
Typically, borrowers have to pay taxes if a lender forgives, cancels, or discharges a debt that is less than the amount owed. This money is considered ordinary income for tax purposes. Yet in early December, Senate Majority Leader Chuck Schumer urged President Joe Biden to write off up to $ 50,000 for federal student loan borrowers – tax-free.
“[Biden] can also ensure that when they do, they are not subject to tax, ”said Schumer.
While it is true that there are times when debt can be forgiven and still exempt from tax, the circumstances are limited. Because this kind of action is seldom as simple as debt cancellation, you could potentially be hit with a tax bomb at the end of the year if or when your student loans are canceled.
Do I have to pay taxes on my student loan forgiveness?
Some tax policy experts say Biden’s new administration could use an executive order to write off debt under the Higher Education Act 1965 to protect borrowers from a high tax bill in the event of remission. But Goldman Sachs analysts noted that Schumer’s plan could have “potentially significant tax implications that could do more harm than good” to borrowers.
In most cases, debt forgiveness is treated as taxable income, which could require student loan borrowers to pay up to 20% of the canceled debt in taxes, unless Biden brings a legislative or administrative change in US tax rules. In other words, if Schumer’s plan forgives $ 50,000 in student loans, you would be taxed as if you received $ 50,000 in cash. And since this is technically income that you have never earned, it can be difficult to find the money for the tax bill. If that seems unfair, you are not alone.
David Reischer, Esq., Lawyer and CEO of LegalAdvice.com, agrees. “As a general rule, you must report any student loan forgiveness you receive on your tax return. The amount you receive is deducted from your annual taxable income and added to your tax bill, [according to the IRS’s latest tax rules]. “
Reischer adds: “But Schumer specifically insisted that any new legislation that deals with this taxable event must eliminate the taxes that would normally be due as a result of the cancellation of such a loan.” Schumer’s loan forgiveness plan would apply to all levels of education.
If you have private student loans and do not qualify for a student loan forgiveness, you should consider refinancing your student loans. With today’s low rates, you could save time and money with a student loan refinance. Head to Credible Now to Refinance Your Student Loans Today.
5 STUDENT LOAN REFINANCING MISTAKES TO AVOID
Are there situations that allow for tax-free debt forgiveness?
The student loan exemption does not apply to private student loans. If you have federal direct loans, you must meet specific conditions to be eligible for a loan forgiveness.
- Public service loan discount: PSLF Cancels up to 100% of your federal direct loans after making 120 qualifying monthly payments counted as qualifying PSLF payments under a qualifying repayment plan. You must also work full time for an eligible employer and work for 10 years before receiving a PSLF loan forgiveness.
- Permanent disability or death: In 2018, the Trump administration exempted permanent disability and death from federal student loans from tax until 2025.
- Insolvency: If your total debt exceeds your total assets, some or all of your loan forgiveness may not be taxable.
If you’ve been affected by COVID-19 and are trying to find ways to save money, use an online tool like Credible to display a rate table that compares the student loan refinancing rates of several lenders at once without impacting your credit.
HOW TO CHOOSE THE BEST STUDENT LOAN TERMS FOR REFINANCING
What to do while waiting
One of the consequences of high unemployment and COVID-19 is the inability of many borrowers to repay student loan debt. Once in office, if Biden accepts Schumer’s proposal for a $ 50,000 loan forgiveness, it could give many students some breathing space. But it is also possible that you will be liable for tax on the amount remitted.
If this happens, your lender will likely issue a Form 1099-C, Debt Cancellation, for the forgiven amount. Because the IRS also gets a copy, it will expect to see this amount on your tax return. In the meantime, you may want to consider other options, such as refinancing your student loans. Use an online tool like Credible to get prequalified student loan refinance rates without affecting your credit score.
Refinancing your private loans when benchmark interest rates are so low can save you money over time and shorten your loan term. However, if you have federal loans, switching to a private loan could make you ineligible for government relief from a number of tax exemption programs, like the PSLF.
If you have good credit and a stable job, your chances of getting a better rate are much better than if you have bad credit or don’t have a job. If you’re not sure what rate you’ll qualify for, use an online tool likeCredible to compare student loan refinancing rates from multiple lenders at once without affecting your credit score.