New Legislation Help Student Loan Tax Burden

Borrowers who currently have all or part of their student loans forgiven as part of their income-based repayment plan, income-contingent repayment forgiveness program, or due to disability or death, are required to pay student loan tax on the amount forgiven as if they had received it as income.

While this is a big win for the borrowers seeing a significant portion of their loans forgiven, others find the write-off to be a financial burden. Having to claim an extra $20,000 in income largely affects borrower’s annual tax return; proving difficult to swallow for some.

However, under the new legislation Student Loan Tax Relief Act, this may be a thing of the past. Under the act, any forgiven student loan debt would be tax-exempt and would be applicable regardless of the reasoning behind the loan forgiveness.

The bill is led by Senator Elizabeth Warren and Senator Bob Martinez, who aim to assist families in avoiding an unfair financial burden.

“Students and families are being crushed by student debt, dragging down the economy and holding back an entire generation in its pursuit of the American dream,” explains Sen. Warren. Adding, “If you’re able to get your student loans forgiven and secure a fresh financial start, you shouldn’t then be saddled with an unexpected tax bill. This places an unfair added burden, especially on families grappling with a tragic loss who inherit the debt from students who will never be able to pay down their student loans.”

This issue came about back in 2012 when a college graduate committed suicide and his mom received a tax bill for $14,000. Due to her son’s loans being forgiven, she was asked to pay the lump sum. Many other families have found themselves in similar situations which is no surprise with the 2011 Department of Education forgiveness of $2.7 billion due to bankruptcy, death, or disability.

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