Good News For Student Loans

As regular readers know, I opposed President Biden’s latest $1.9 trillion stimulus plan which became law last week. In my view (and many others), it is way too big; 90% of it is for liberal pork barrel spending; and the economy is already on-track for its strongest growth in decades, without the giant stimulus goose.

However, upon reading in more detail what all is included in the $1.9 trillion stimulus plan, I ran across one small provision I actually agree with. This provision has to do with how student loans are repaid and provides a sensible tax break for former students who are trying to repay their college debt.

As you may know, there are several formal programs through which most students can structure their repayment plans, each of which allows student borrowers to base the amount of their payments on how much income they earn and how many dependents they have. These various options are collectively referred to as “income-driven repayment plans.”

The plan sponsors work with former students to determine the appropriate monthly repayment amount, which is restructured periodically as their income changes. The student agrees to make these payments, typically for 20-25 years, after which time the remaining loan balance is forgiven in full.

For millions of student borrowers, an income-driven repayment plan is the only affordable option to service their college debt. But it comes with a significant catch!

As an example, let’s say you have $100,000 in student debt and you agree to pay $210 a month for the next 20 years (and for purpose of this illustration, let’s assume your payment never changes and there’s no interest on the debt, which there is). At the end of 20 years, you would have paid in $50,400, which means the remaining balance of $49,600 would be eligible to be forgiven in full.

Now, here’s the BIG catch: Per current IRS tax code, that $49,600 is treated as immediate taxable income. Let’s next assume you have an effective income tax rate of 30%; in that case, you immediately owe the IRS almost $15,000.

1 2 3
View single page >> |
How did you like this article? Let us know so we can better customize your reading experience.

Comments

Leave a comment to automatically be entered into our contest to win a free Echo Show.