Recently, you may have heard about student loan forgiveness on the news or read about changes online. President Joe Biden has canceled $11.5 billion of student loans since coming into office. The American Rescue Plan affects many student loan borrowers and may have a large impact on your taxes.
What has changed with student loan forgiveness?
In certain circumstances, loans can get their loans canceled or forgiven. Student loan forgiveness frees borrowers from their responsibility to pay back a portion of their federal student loan debt or in some cases, the entire debt.
On October 6, 2021, the Biden administration declared changes to the federal student loan forgiveness program that would allow a greater percentage of public sector workers to ask for a reprieve on their educational debts.
If you have student loan debt, this possibility may seem like a weight is being lifted from you, however very few people are eligible. Requirements may differ depending on the type of loan, though many grant forgiveness solely for those related to particular public service professions such as military service, government service, and teachers.
Borrowers can be credited for those amounts if they apply for loan forgiveness by Oct. 31, 2022, provided that they were working in an eligible profession when the amounts were paid.
How did student loan forgiveness work previously?
The United States has had existing student debt forgiveness programs; but very few people make use of these programs. There are changes that have come with each president that make student loan forgiveness more or less accessible, but these new changes seem to be forgiving larger quantities of debts than ever before.
Additionally, before the American Rescue Plan was established, student loan forgiveness programs would have hit borrowers with a considerable tax bill.
Are forgiven student loans taxable?
This is normally a headache of a topic to cover because there are a myriad of programs and options out there for student loan borrowers to potentially get some or all of their student loan debt forgiven. These programs have complicated and sometimes confusing eligibility criteria. To make matters even more frustrating, some forms of student loan forgiveness are taxable events, while others are not.
Traditionally, when a consumer debt is cancelled, that cancelled debt would be reportable to the IRS as “income” that the borrower earned. That could, in turn, result in the borrower being required to pay income taxes on the cancelled debt, as if the borrower earned the amount of the debt cancellation in income. Typically, the lender will send the borrower a Form 1099-C during tax season for any debts cancelled during the previous year. Before these new laws were passed, if you had $10,000 of debt forgiven and you were in a 20% tax bracket, you would pay roughly $2000 in taxes on this forgiven load (No, tax brackets are not that simple but we are using simpler numbers for the sake of example. For more information on Tax Brackets, read here). The good news is that the borrower doesn’t have to pay back $10,000, but the bad news is that they would owe $2,000 for taxes”.
Since Biden approved the American Rescue Plan into law, which incorporated a provision that all student loan forgiveness is tax-free. This will give true relief to student borrowers without worrying they’ll gain a large tax bill they cannot afford.
As we saw from loan forgiveness in the Paycheck Protection Program (PPP), the loans forgiven under the PPP are not taxable to business owners, if the loans are used for eligible business expenses,” he says. This is similar to what is now happening with student loan forgiveness.
What do I need to do?
If you are working in the public sector, visit the official site for this occasion: www.studentaid.gov/pslfwaiver.
This site will help you figure out if you are eligible and if your employer is entitled. To qualify for the waiver, borrowers with Federal Perkins loans, FFEL Program loans, or any federal student loans that are not direct have to incorporate their loans into the direct loan application by October 31, 2022.
Here are a few quick tips to access the relief:
- Ensure the Department of Education has your most current contact details
- Review to understand what type of federal student loans you have
- Focus on 120 student loan payments, not 10 years of public service
- See if your latest or past profession is qualified for PSLF
- Consolidate FFEL or Perkins Loans into the Direct Loan program before October 31, 2022
- Submit a PSLF form before October 31, 2022
As we have seen in the last couple of years, the only constant we see is that changes keeps coming. Keep an eye out as Congress negotiates any additional relief measures to see how they may impact you and your student loan forgiveness. Student loans are changing, and these recent changes to loan forgiveness is another case.
This will have a large impact on taxes this coming year as well as for students and the upcoming workforce when determining which jobs they would like to select and the types of education they pursue.
If you have any questions give us a call at Molen and Associates or check out our website for more information at www.molentax.com.