Student loan forgiveness would remain tax-free under Biden’s budget

Pelican Press · March 18

Student loan forgiveness would remain tax-free under Biden’s budget

US President Joe Biden speaks at the Pieper-Hillside Boys & ****** Club in Milwaukee, Wisconsin, US, on Wednesday, March 13, 2024.

Sara Stathas | Bloomberg | Getty Images

How student loan forgiveness used to be taxed

Before that Covid-era change, any student loan debt canceled by the government was considered taxable and levied at the borrower’s normal income tax rate.

The federal tax bill could be hefty.

According to a rough estimate by higher education expert Mark Kantrowitz, under previous tax rules, a borrower with a remaining balance of $10,000 after 20 or 25 years of payments could have to write the IRS a check for $1,200, assuming they’re single and have an income less than $35,000. Yet depending on a borrowers’ circumstances, their federal tax bill could be as high as $15,400, Kantrowitz said.

Borrowers can also owe state taxes on the forgiven debt.

‘Replacing education debt with tax debt’

Many student loan borrowers who get forgiveness aren’t able to afford a tax bill, Kantrowitz said.

“These borrowers have had low income for decades and are unlikely to have any assets,” he said. “The tax liability might be as much as half of their annual income, or more, on top of their current tax liability.”

If borrowers sign up for a payment plan with the IRS, they’re merely, “replacing education debt with tax debt,” Kantrowitz said.

The millions of borrowers enrolled in income-driven repayment plans would be most impacted most by ending taxation of forgivable education debt. These plans, which cap a borrowers’ monthly bill at a share of their discretionary income, lead to debt erasure after 10 to 25 years of payments. (There are currently four different plans, each with different rules.)

Other student debt forgiveness plans, including