The stimulus bill working its way through Congress would end the policy of taxing borrowers’ forgiven student debt. That could save some people up to $10,000.
A significant provision making any student loan forgiveness tax-free has been included in the $1.9 trillion federal stimulus package that’s working its way through Congress and will likely soon be signed into law. Currently, any student loan debt canceled by the government can be considered taxable and levied at the borrower’s normal income tax rate. For example, if someone earns $50,000 a year, and was at a 22% tax rate, and received $30,000 in student loan forgiveness, they might be slapped with a $6,600 bill from the IRS. Soon, borrowers may be off the hook from these payments. What borrowers stand to save There are around 45 million student loan borrowers in the U.S. A third of these borrowers are enrolled in « income-driven repayment plans. » These plans aim to make borrowers’ payments more affordable by capping their monthly bills at a percentage of their discretionary income and cancelling any of their remaining debt after 20 or 25 years. At that point, their forgiven loans are treated as income and the IRS sends the borrower a form called a 1099-C. « It’s as if someone gave money to the borrower to repay the debt, » said higher education expert Mark Kantrowitz. The tax bill can be significant: Let’s say a borrower earns somewhere roughly between $85,000 and $160,000, falling at a 24% tax rate.
