Loan forgiveness is possible
Experts see tax break in $1.9T as bellwether
The tax break on college debt cancellations in the COVID -19 relief package signed last week by President Joe Biden has removed a potential roadblock to forgiving student loan debt: taxes .
The provision won’t count any debt forgiven from Dec. 31, 2020, to Jan. 1, 2026, as income. Under one of the existing forgiveness programs (incomedriven repayment), the amount forgiven is reported to the IRS as income and taxed according to the borrower’s current tax bracket.
Any debt forgiveness would not benefit borrowers if it led to an unaffordable tax bill, said Douglas Webber, associate professor of economics at Temple University.
“I see this as one step closer to eliminating what would be not just a big potential downside, but a big public relations problem,” Webber said.
The tax measure was adapted from the Student Loan Tax Relief Act spearheaded by Sens. Bob Menendez, D -N.J., and
Elizabeth Warren, D -Mass. On March 6, Warren tweeted, “This clears the way for President Biden to #Cancelstudentdebt without burdening student borrowers with thousands of dollars in unexpected taxes.”
Experts say the tax relief measure could do just that.
“Given the context and all the discussions about loan forgiveness, I think it’s likely that this is a nod from Congress to open up this door,” said Megan Coval, vice president of policy and federal relations at National Association of Student Financial Aid Administrators.
Artem Gulish, senior policy strategist at Georgetown University Center on Education and the Workforce, said the relief package was just a start for student loan borrowers.
“This is the first thing the Biden administration is putting through; there is still the potential for forgiveness,” Gulish says.
However, there still isn’t legislation or executive order that answers the big questions of “if,” “how much,” or “when” forgiveness could happen.
What bill could look like
Imagine there was no tax relief included in the stimulus package. Optimistically, let’s also look into a crystal ball and say you have $10,000 of student loan debt forgiven sometime this year. Your earnings are $68,000 (the approximate median in the U.S.), which means you fall within the 22 percent tax bracket. Next year when you pay taxes on 2021 income, the forgiven debt would be taxed at 22 percent and you would owe $2,200 on it.
Without a tax break, forgiveness could also have pushed you into a higher tax bracket. Say you earned $85,525 — the high end of the 22 tax bracket — and had $10,000 forgiven, which pushed you into the next bracket. Since it’s a progressive tax system, you would end up paying 22 percent on your income, but 24 percent on that amount that spilled over into the higher tax bracket ($2,400 in this example).
There are additional sacrifices on the lower end of the income spectrum, said Erica
Blom, a senior research associate at the Urban Institute, a nonprofit research organization. Sliding into a different tax bracket could result in loss of credits, such as the earned income tax credit or a child tax credit.
Where forgiveness stands
Democratic lawmakers, a group of 17 state attorneys general and consumer rights advocates have called on Biden to cancel up to $50,000 in federal student loans.
The president has said that he backs $10,000 in blanket forgiveness for federal student loan borrowers through congressional action.
The 42.9 million federal student loan borrowers who collectively owe $1.57 trillion to the federal government stand to benefit from blanket forgiveness. Having $10,000 forgiven would wipe out debt entirely for 15 million student loan borrowers , according to a Nerdwallet analysis of student loan data.