Tax DebtsTax Laws

Bill seeks to close gap in tax code for forgiven student debt


Student loans are now one of the highest sources of debt for Americans, with more than $1 trillion owed. On average, college students graduating with about $30,000 of debt, and many can barely afford to make their loan payments each month.

Earlier this year, President Obama expanded the “Pay as You Earn” program, which is intended to help borrowers in this situation by basing their monthly loan payments on their income. Then, after 20 years of consistent payments, any remaining student loan balance is forgiven.

This sounds like a great program, but it has a catch. The Internal Revenue Service considers forgiven debt to be taxable income, which means the student loan debt that is forgiven after 20 years of consistent payments will come with a tax bill that could be tens of thousands of dollars.

So, some borrowers could end up exchanging one form of debt for another. Seeing the problem with this, two members of Congress have proposed a bill that would allow borrowers who took part in the Pay as You Earn program and had debt forgiven to receive an exemption from the taxation that usually applies.

The Relief for Underwater Student Borrowers Act, which was introduced in late July, would also apply to student loan debt that is forgiven as a result of a borrower suffering a total permanent disability or passing away. The two authors of the bill say it “closes a major gap in our tax code.”

However, the bill is still in its infancy and like most tax-related measures in Washington will likely face an uphill battle. Hopefully, at the very least it is able to start a conversation about this important tax issue facing millions of Americans.

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