Under President Joe Biden's new income-driven repayment plan, millions of borrowers may be eligible to receive some student loan forgiveness. Some may have to pay tax on these savings, according to a recent report.
The Biden administration introduced the Saving on a Valuable Education plan to help student loan borrowers after the Supreme Court's decision to strike down Biden's student loan forgiveness plan.
The plan will reduce the monthly payment by $0 for borrowers who earn $32,800 a year or less, meaning that the average monthly payment would be roughly $15 an hour.
A $12,000 or less balance will receive forgiveness of any remaining balance after making 10 years of payments, with the maximum repayment period being increased for every additional $1000 borrowed.
More than 800,000 Americans with student debt who have been in repayment for more than 20 years have already started to see those debts canceled, and the administration estimates that over 20 million borrowers could benefit from the SAVE plan.
Although discharged student debt is exempted from federal tax due to the American Rescue Plan Act of 2021, certain states may still tax the savings, according to a report by the Tax Foundation.
As of 2023, Indiana, North Carolina and Mississippi have said that the balance of forgiven student loans will be taxed as income. Arkansas and Wisconsin may have to pay taxes on forgiven student loan debt, but these states are currently examining their tax laws and have yet to decide.
If you have a private student loan, you may consider refinancing it to a lower interest rate to lower your monthly payments. Go to Credible to compare different lenders and choose the one with the best rate for you.
How much borrowers may be taxed.
Student loan borrowers who have their debts discharged under Biden's SAVE plan can see the amount of debt forgiveness they receive show up as gross income, per an experian blog.
A borrower's federal student loan forgiveness balance may be included in a tax bill, Experian said. But it may not be enough to push borrowers to increase their tax rates.
If you are currently in school and need more financial aid than you can obtain through FAFSA, you may consider a private student loan. Credible can determine your personalized rate without affecting your credit score.
A student loan tax bomb occurs when a student loan lender forgives all or a portion of your debt, causing you to include this amount in your taxable income, according to TurboTax.
If your state does not exempt federal student loan forgiveness from taxes, you will have to calculate your state taxes with the forgiveness factored into your income.
Once you estimate your tax bill, optimize saving the money you would have paid toward your forgiven loans, according to TurboTax. This can help you avoid a cash crunch caused by a student debt tax bomb.
If you hold a private loan with a federal income-driven repayment plan, you may be enrolled in a federal income-driven repayment plan, but you may refinance your loans to a lower rate. To compare loans from different banks without affecting your credit profile, visit Credible.
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