![]() This is an important first step to provide critical relief to millions of borrowers. Today, President Biden has made an investment that will lift the burden of millions of student loan borrowers shackled by exorbitant debt. I am happy President Biden has taken needed action to cancel up to $20,000 in student loan debt and capped the income-based student loan repayment at 5% of borrowers’ monthly income. “I am incredibly proud of this monumental victory and the work we’ve done to get us to this moment. ![]() It also includes a cap of 5% of monthly income. Ilhan Omar (D-MN) released the following statement on President Biden’s executive order announcement to cancel $20,000 in student loan debt for Pell Grant recipients and $10,000 for those without Pell Grants who have incomes of up to $125,000 per year. States are expected to issue further guidance on how they’ll treat this debt cancelation for their state residents pending further IRS guidance and state legislative action where necessary.Īs such, if you are potentially eligible for this program, contact your tax advisor at FORVIS or submit the Contact Us form below to confirm the income tax implications for your state or if you have other questions.MINNEAPOLIS-Rep. Absent guidance to the contrary, the states that could potentially tax the amount forgiven include Arkansas, Indiana, Massachusetts, Minnesota, Mississippi, North Carolina, and Wisconsin. When the ARPA became law, some states chose to follow the ARPA and exempt debt cancelation from state taxation through January 1, 2026, as well-but not all states took that route.Īccording to a Tax Foundation analysis, under current law and existing guidance, approximately seven states could potentially end up taxing borrowers on the amount of student loans forgiven under this executive order if it is implemented by the Department of Education. Generally, states choose to either conform or not conform to federal tax rules. However, borrowers eligible for this program should consider the impact the debt forgiveness may have on their state tax liability. This means that student loans forgiven under this executive order should not be subject to federal income tax. In this situation, the American Rescue Plan Act of 2021 (ARPA) exempts canceled student loan debt from federal tax if the debt is forgiven between December 31, 2020, and January 1, 2026. However, there are exceptions to this rule. ![]() Generally, if a loan or other debt you owe is canceled, you must report the cancelation as income for tax purposes. The Department of Education is setting up an application process since it will need to confirm borrowers’ income to determine eligibility, but more information and applications are expected to be released within the next few weeks with the program implemented before the end of the year. Restructure interest on loans so that interest does not accrue if borrowers are making minimum payments (even if the monthly minimum payment is $0 due to low income)Īt this time, the logistics of how this student loan forgiveness will be executed are unclear.Lower forgiveness eligibility from 20 years to 10 years for borrowers with original loan balances of $12,000 or less who make their required payments for 10 years.Raise the amount of income considered non-discretionary income to 225% of the federal poverty level so that borrowers making less than about $30,577 (or $15 an hour for full-time workers) would not have to make any payments while under this income threshold. ![]() Decrease minimum payments from 10% to 5% of discretionary income for income-based repayment plans on undergraduate loans.The executive order also requests that the Department of Education make further changes to the federal student loan program, including: To free up resources for the Department of Education to facilitate this program, the student loan repayment pause is extended through Decem(student loan repayments on federal loans were supposed to begin after August 31, 2022). Current students with loans are eligible, but a dependent student’s eligibility will be based on their parent’s income. The Biden Administration anticipates that nearly 90% of this relief will go to those earning less than $75,000. Only federal student loans are eligible for this debt relief, including Parent Plus loans and loans taken out for graduate school, but relief is available only for borrowers who make less than $125,000 per year ($250,000 for married couples). Under the executive order, the Department of Education is instructed to cancel up to $10,000 in student loans per borrower and up to $20,000 per borrower for Pell Grant recipients. On August 24, 2022, President Biden announced a plan to forgive up to $20,000 of student loan debt for low- to middle-income borrowers.
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