Student Loan Forgiveness Tax-Free Until 2025, Biden Wants to Extend Policy Permanently

US President Joe Biden is considering making student loan forgiveness tax-free permanently. He made this point in the White House budget plan, unveiled last week.

If the proposal passes, the student loan cancellation under Income-Driven Repayment (IDR) and Total and Permanent Disability (TPD) plans would be non-taxable. The proposal on permanent federal tax exemption should be approved by the House and Senate to be enacted.

The student loan forgiveness plan is non-taxable until December 31, 2025, under the American Rescue Plan Act of 2021. President Biden wants to extend it for an unlimited time, Erudera.com reports.

“The American Rescue Plan Act included a provision temporarily modifying the tax treatment of discharged student loan debt. Specifically, the law excludes from gross income qualifying student loans that are discharged between Dec. 31, 2020, and Jan.1, 2026. During this period, the amounts of forgiven student loan debt won’t be subject to federal taxation,” according to the guidance from the Education Department regarding the IDR Account Adjustment.

Advocates have supported the policy, highlighting the stress that student borrowers often experience due to the tax bill.

“Unfortunately, borrowers often experience significant stress as they worry about the tax bill that could come once their loan balance is forgiven,” Betsy Mayotte, President of the Institute of Student Loan Advisors, a nonprofit organization that helps student loan borrowers, said in a statement.

The higher education expert Mark Kantrowitz has made some remarks on this matter, saying that student loan borrowers whose balance was $10,000 after 20 or 25 years of making payments could be required to pay $1,200 to the IRS, provided they are not in a relationship and earn less than $35,000.

However, according to a report by CNBC, expert Kantrowitz said the tax bill could reach $15,400 depending on the individual situation of student loan borrowers.

Student loan forgiveness became temporary tax-free at the federal level for the first time in March 2021 thanks to a provision in the $1.9 trillion federal COVID-19 stimulus package signed into law by President Joe Biden.

Before the COVID-19 pandemic, student loan borrowers in the United States were subject to taxes imposed by the government on their forgiven debt. The tax was levied at the standard income tax rate, and the bill could be heavy.

Since 2021, the Biden Administration has approved more than $130 billion in student loan forgiveness under different initiatives.