Looking to get student loan forgiveness? Get ready for a higher tax bill.
A new report from the advocacy group Protect Borrowers on Wednesday revealed the impact of a “tax bomb” that borrowers now face after the tax exemption for student loan relief expires in 2021.
In one example, Protect Borrowers estimated that a married couple with two children making $60,000 a year would face about $7,200 in additional federal taxes and lose the credit if about $50,000 in student debt was forgiven. In the various scenarios it modeled, the additional cost was approximately $6,000 to $12,000.
The analysis is based on 2026 federal tax rules and uses the average student loan balance canceled under an income-driven repayment plan, which Student debt is forgiven after 20 or 25 years, depending on when the borrower first took out the loan.
“Congress designed income-driven repayment plans and promised debt relief so borrowers are not forced to carry the burden of student loans for life,” said Jenny Zhang, a policy analyst at Protect Borrowers. “But that promise means nothing if Americans who eventually reach the finish line face huge tax bills that plunge them into debt.”
Ex-President Biden’s American Rescue Plan exempted Debt relief from federal income taxes. The provision is set to expire in 2025, meaning borrowers who qualify for relief are now required to pay the taxes that come with it.
Southern borrowers in states such as Louisiana, Mississippi and Arkansas are expected to see the largest tax increases because they typically have larger balances and lower incomes, the analysis said.
Borrowers previously told Business Insider they were concerned about larger tax bills looming. Misty Knapp, for example, said she’s just six payments away from debt relief, but she’s worried about paying the taxes that will come with it.
“I don’t know what that’s going to look like, but if I were taxed on the amount that’s forgiven, it’s going to be a lot of money,” Knapp said.
Democratic lawmakers have also pushed to restore the tax exemption. Last year, one of their groups sent a letter to the Treasury Department, citing an early analysis by Protect Borrowers that estimated borrowers on income-driven repayment plans could face losses of $5,800 to $10,000 if they received debt relief.
“By punishing IDR beneficiaries with huge tax bills, the federal government undermines the fundamental purpose of the IDR program and breaks its promise to borrowers,” the lawmakers wrote.
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