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Biden wants to make student loan forgiveness tax-free permanently

The American Rescue Plan Act of 2021 made student loan forgiveness tax-free at the federal level through the end of 2025.

President Joe Biden wants to extend that policy indefinitely.

While the president continues to try to deliver on a sweeping federal student loan forgiveness plan, tucked into his 2025 fiscal-year budget is a provision that would shield forgiven education debt from federal taxes permanently.

Consumer advocates are in support of such a policy.

“Unfortunately, borrowers often experience significant stress as they worry about the tax bill that could come once their loan balance is forgiven,” said Betsy Mayotte, president of The Institute of Student Loan Advisors, a nonprofit.

White House targets ‘junk fees’ on student loans and other higher education costs

While most private lenders have done away with student loan origination fees, the federal government still charges them. Federal student loan borrowers can face expenses of 1% to 4% of their total borrowing amount. President Joe Biden’s 2025 budget, released earlier this week, calls for the end of these fees.

The White House said on Friday it considers these expenses to be “junk fees,” defined as “hidden costs or surprise fees that companies and institutions include on customer or student bills, increasing their costs.”

Consumer advocates praised Biden’s efforts.

“By eliminating origination fees on federal student loans, borrowers should be able to borrow less to cover their costs,” said Betsy Mayotte, president of The Institute of Student Loan Advisors, a nonprofit.

With student loan payments resuming and inflation still high, many struggle to afford the basics

According to the Education Department, about 40% of borrowers who owed a payment in October when payments resumed failed to make that payment by mid-November.

Borrowers won’t face late fees for a one-year grace period, but Betsy Mayotte, the president of the nonprofit The Institute of Student Loan Advisors, warned interest is still building.

“If the loan ends up defaulting, it’s going to be a big hit on your credit. Future debt that you need to take on — a mortgage, a credit card, a car loan — is likely going to have a much higher interest rate, and therefore cost you more,” she said.

What student loan borrowers need to know this tax season

For 2023, the deduction starts to phase out for individuals with a modified adjusted gross income of $75,000, and those with a MAGI of $90,000 or more are not eligible at all. For married couples filing jointly, the phaseout begins at $155,000, and those with a MAGI of $185,000 or more are ineligible.

Borrowers’ eligibility for the student loan interest deduction may also be reduced if their employer made payments on their student loans as a work benefit, said Betsy Mayotte, president of The Institute of Student Loan Advisors, a nonprofit.

If your student loans were forgiven last year, what does that mean for your tax bill?

Betsy Mayotte, founder of the nonprofit Institute of Student Loan Advisors, has made a career of providing free student loan advice. So she gets questions about all things student debt-related — including taxes.

“I work with a lot of borrowers that are afraid of pursuing forgiveness because they have this vision of the IRS coming after them for, you know, a six-figure tax bill,” she said.

But for now, she said, that fear is unfounded. In 2021, as part of the American Rescue Plan, Congress temporarily changed the law so that student loan forgiveness is not considered taxable income.

“So if the forgiveness happens by the end of 2025, there will be no federal tax on it,” explained Mayotte.