On Wednesday, Aug. 24, President Biden announced, via executive order, plans to cancel up to $10,000 of federal student debt for borrowers with income below certain thresholds. Up to $20,000 of debt would be canceled for recipients of Pell Grants. Borrowers filing a joint tax return or as head of household with reported income of less than $250,000 will be granted forgiveness; all other filers must have reported income of less than $125,000 to be eligible. At this time, it is unclear whether income refers to taxable income or adjusted gross income.
Pursuant to a provision included in the American Rescue Plan Act of 2021, this forgiveness will be excluded from the borrower’s income for federal tax purposes. It should be noted that treatment at the state level could vary, with some jurisdictions possibly requiring the cancellation be included in state taxable income.
Additionally, a final extension of the repayment moratorium on remaining debt is provided through Dec. 31, 2022; there are no income restrictions associated with this pause. Borrowers of undergraduate loans would be allowed to cap their repayment amounts at 5% of their monthly income.
Separately, on Aug. 23, the U.S. Department of Education announced it approved approximately $10 billion in student debt forgiveness covering more than 175,000 borrowers in connection with its Public Service Loan Forgiveness program. Broadly, this relief is to incentivize borrowers to seek employment in public service. Similar to the debt relief offered by the Biden administration, this cancellation is not taxable for federal purposes, but the tax treatment may vary among states.
Please reach out to your Baker Tilly advisor if you have questions regarding your tax position.
The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. Tax information, if any, contained in this communication was not intended or written to be used by any person for the purpose of avoiding penalties, nor should such information be construed as an opinion upon which any person may rely. The intended recipients of this communication and any attachments are not subject to any limitation on the disclosure of the tax treatment or tax structure of any transaction or matter that is the subject of this communication and any attachments.