Here’s how the student loan tax provision could benefit you
Normally, when the government cancels your student loan debt, it would get treated as taxable income — meaning, you’ll need to cough up a good chunk of your money to the Internal Revenue Service (IRS) come tax time, even though you won’t need to repay your student loans in full.
Say a student loan borrower with $50,000 in outstanding debt gets $35,000 waived. If that $35,000 gets taxed as income, and assuming an overall effective tax rate of 22%, the borrower would still need to pay $7,700.
Under Biden’s relief package, all student debt cancellation will be exempt from federal taxes, through December 31, 2025.
The exemption covers federal and private student loans and could save you quite a bit on interest as well in case you weren’t able to pay off your debt upfront.
Aside from the temporary tax-free student loan forgiveness, here are some added benefits to come out of the new bill:
Tax-free stimulus checks
Americans who make less than $75,000 a year (or married couples making less than $150,000) will receive $1,400 in direct payments, which have begun to appear in the accounts of those who qualify for them.
The best part is that these benefits are all exempt from taxes, so you won’t need to pay a penny to the IRS for receiving them. You can even use your stimulus checks to help pay off your past student loan debt, or any other education-related expenses.
Financial support for schools and colleges
The relief package allots $170 billion to educational institutions, with $35 billion going towards public colleges and universities, including minority serving institutions, like historically black colleges and universities.
Some of that money could help provide some much-needed financial aid for struggling students, through the Higher Education Emergency Relief Fund.
Some relief for small business owners with defaulted student loans
$7.25 billion is being added to the Paycheck Protection Program, which offers forgivable, low-interest loans to struggling small businesses. The program currently covers business owners with defaulted or delinquent student loans, whereas they may not have qualified before.
What taxpayers with student loans should be doing right now
Federal and private student loans aren’t considered taxable since they have to be repaid, but in the past, when the IRS canceled or waived any of your student loan debt, you had to pay taxes on it.
With the new provision, all student loan forgiveness is currently tax-free, but current students and graduates should still check for other provisions, especially if you don’t qualify for a forgiveness plan.
The IRS site has a page for borrowers to check when filing their returns and to help you determine whether any financial aid you’ve received is considered taxable. If you paid any student loan interest in 2020, you could claim a deduction.
Find out whether any scholarships or grants you’ve received count as tax-free and look out for any additional tax benefits you can claim, like educational credits or tuition deductions.
Tips for those who don’t qualify or need to lessen the debt load
While the student loan tax benefit is certain to aid borrowers who might otherwise owe a rather hefty bill to the IRS, it’s important to recognize that Biden isn’t terminating student loans in their entirety.
This means that if you don’t qualify for complete forgiveness, you still need to pay off your past, present and future student loans. The student loan payment freeze has been extended through Sept. 30, 2021, but here are some tips to free up some funds to put toward your student loans or help lower your monthly payments.
Consolidate your debt: If you’re struggling to pay multiple debts, getting a loan at a lower interest rate can make things more manageable.
Consider refinancing: If you have excellent credit and a reliable income, you might want to refinance your student loans to cut down on your monthly payments.
Bring in a little extra income and trim your expenses: Have a hobby or special talent? Turn it into a side hustle to bring in extra income.You can also download a free browser extension that will automatically scour the web for better prices and coupons whenever you shop online for the things you need.
Lower your insurance bills. If your insurance bills are looking a little high maybe it’s time to shop around for a better deal. If you haven’t thought about your insurance bills in a while, you could also save hundreds on your homeowners insurance by comparing rates to find a lower price.