Stimulus bill provision grants student loan forgiveness tax exemption

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(WETM/CNBC) — A provision in the $1.9 trillion coronavirus stimulus bill exempts all student loan forgiveness from taxation through 2025.

The bill does not include student loan forgiveness. However, this tax exemption is just the first step in a push to student loan forgiveness.

President Biden said in February that he is open to forgiving $10,000 in student loan debt. However, some democrats in Congress are urging the President to forgive $50,000 per borrower.

CNBC explained how previously 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.

Matthew Burr, owner of Burr Consulting L.L.C., explained how much tax money could be off of people’s shoulders.

“It could be 11 to $12,000 if they forgive $50,000 in student loans,” said Burr. “Obviously, [this provision] would relieve some of that burden. I think if it was $10,000 it would probably be more in interest than anything else for most people.”

Leslie Tayne, a debt relief attorney, explained how the issue for many people is compound interest.

“In the beginning when you’re not earning a lot of money, you’re making small payments on it,” said Tayne. “But, your payments may not even be equal to the interest. So as a result, you’re not even hitting principle for many years and that is why many student loan borrowers find themselves in a situation where the amount that they actually pay back far exceeds what they borrowed.”

While this tax exemption will help many people, Burr said this is not a solution to the deeper issue.

“Frankly, it doesn’t address the ballooning cost of higher education at all,” said Burr. “It is a short term non-solution to a long-term problem, in my opinion. It’s not addressing the underlying issues of the cost of higher education.”

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