This New Senate Bill Would Make Forgiven Student Loans Non-Taxable

Posted on August 1, 2016 at 12:00pm by

There are several situations where borrowers can have their student loans forgiven. Death, completing income-based repayment programs or succumbing to permanent disabilities are all examples. In some cases, the forgiven loans are treated as taxable income by the IRS.

New legislation introduced by Senators Ron Wyden, Elizabeth Warren, Bob Menendez and Debbie Stabenow could eliminate this unexpected tax burden for both federal and private loans. The Student Loan Tax Relief Act would end this downside to loan forgiveness.

Several different groups of people would benefit from the Student Loan Tax Relief Act.

Who Would Benefit from the New Student Loan Forgiveness Rule?

Income-based repayment plans will become more attractive if this new legislation passes and is signed into law. Keep in mind, one of the major downsides to income-based repayment programs (IBR, PAYE, REPAYE) is that borrowers can be hit with large tax bills upon completing payments (with the exception of borrowers enrolled in public service loan forgiveness). Fear of taxes may keep eligible borrowers from enrolling in these helpful programs. Income-based plans can cap monthly payments at 10 to 15 percent of a borrower’s discretionary income. Instead of paying $460 a month, some borrowers may owe $95 a month –  depending on what they make.

Family members with Parent PLUS loans who have lost children would no longer have to worry about sending death certificates to loan servicers. The phone calls from collectors would stop, and there would be no tax obligation.

Borrowers left permanently disabled by accidents or disease would not have to worry about paying the IRS.

Starting to see the benefits? After all, how can borrowers benefit from loan forgiveness if they end up owing an unaffordable sum in taxes to the IRS? Whether or not the Student Loan Tax Relief Act passes and gets signed into law by the next president is open to speculation. It is worth mentioning that millions of borrowers are enrolled in income-based plans are disabled or have passed away. The pending legislation would affect many people.

The Kansas City bankruptcy attorneys at The Sader Law Firm can help borrowers find ways to manage unaffordable student loan payments.