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Student Loan Forgiveness & YOUR TAXES!?

So, the biggest FINANCIAL NEWS we’ve heard recently would have to be President Biden’s announcement to cancel $10,000 in Student Loan Debt for all borrowers making less than $125,000 per year (or, $250,000 for those who are Married).

90% of these relief dollars will go to individuals making less than $75,000 per year.

If you were a low-income PELL GRANT recipient, that goes up even further to $20,000.

The PAUSE on payment being due has also been extended one final time, to December 31st 2022. The Department of Education will be developing a portal or form for borrowers to complete by the Fall to apply for the debt cancellation.

Lastly, they are seeking to amend the PAYMENT CAP for undergraduate loans from 10% down to 5% of a borrower’s discretionary income for all income-based repayment plans.

Wow! What do we think about this? $10,000 of the highest- interest, longest-term financial obligations we have in current society. That’s an unprecedented impact on so many individuals within our country.

The United States has seen a consistent, skyrocketing increase of both tuition cost and students taking out loans. This suggests (and it’s not uncommon in our experience) that there’s some kind of pressure or expectation

The New York Times reported of statistics revealed by the Obama administration that:

  • ”a majority of people holding student debt have moderate incomes and low balances.

  • Many have no degree, having dropped out of public college or vocational school after a few semesters.

  • They carry little debt, but also do not get the benefit of a college degree to help them pay off that debt.”

45 million people owe $1.6 TRILLION in the U.S. for federal loans taken out for college — more than on car loans, credit cards or any other consumer debt (other than mortgages).

By canceling some of this held Student Debt, a window of opportunity is being opened for those who are suffering from poor credit – preventing them from renting apartments, taking certain jobs, or purchasing a home or car.

It would also help encourage those to pay off the last of what they have left, with less predatory interest and policies, and be better able to afford today’s “American Dream.”

Now, if you’re receiving it – how does this affect YOUR TAXES?

So, in preparation of this, Congress & Biden actually expanded the federal student loan forgiveness tax exemption when they passed the American Rescue Plan in 2021.

The provision exempts any federal student loan cancellation from taxation through the end of 2025.

This means no one is subject to federal income tax for any federal student loan forgiveness which is passed prior to January 1st, 2026.

However – there are several states with State Income Tax measures that could treat this debt cancellation as taxable income:

  • Arkansas

  • Hawaii

  • Idaho

  • Kentucky

  • Massachusetts

  • Minnesota

  • Mississippi

  • New York

  • Pennsylvania

  • South Carolina

  • Virginia

  • West Virginia

  • Wisconsin

This is what banks and credit companies do when you have a consumer line of credit settled or forgiven – issuing you a 1099-C at year-end, so you are taxed on what’s unpaid.

That could mean several hundred dollars on your State Income Tax bill, depending on the State.

Keep in mind: individual States would now be deciding whether to pass complimentary measures exempting the $10k from State Income Tax (just like they did with the PPP), or counting it as income and expecting you to pay. If you live in one of these states, you’ll have to pay attention and see what guidance is issued.

So for now, unless you live in one of these States – you’re in good shape with your taxes.

The jury is still out and there’s Economists on both sides as to whether this will increase or not affect INFLATION.

At face value, people who were unable to purchase homes or cars will be closer to doing so – and additionally, the up-to $10k that would have gone to student loans (and rising interest) can now be utilized differently.

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