On Wednesday, CNBC posted an article about the tax impact of the student loan forgiveness. Obviously, the loan forgiveness is a cost to the federal government, but is there any financial return?
The article reports:
If you’re poised to benefit from President Joe Biden’s up to $20,000 in student loan forgiveness, you may also be wondering if the erased debt will trigger a tax surprise come April.
The short answer is: It won’t, at least on your federal tax return.
Biden on Wednesday announced that he will forgive $10,000 in federal student debt for most borrowers, limited to borrowers making less than $125,000 per year, or $250,000 for married couples filing together or heads of households.
He will also cancel up to $20,000 for Pell Grant recipients, Biden said in a tweet.
The article notes how actually paying their student loans has impacted their taxes in the past:
Borrowers with federal or most private student loans are usually able to subtract up to $2,500 a year in interest payments they’ve made on their loans from their gross income, reducing their tax liability.
The deduction is considered “above-the-line,” which means you don’t need to itemize to qualify for the break.
There are income phaseouts, and individuals who earn above $85,000 and couples who make more than $175,000 in 2022 are not eligible at all. Your lender is supposed to report your interest payments to the IRS on a tax form called a 1098-E, as well as provide you with a copy. You claim the deduction on line 20 of Schedule 1.
Most borrowers haven’t been eligible for the deduction in more than two years because they haven’t been making payments on their loans.
Since March 2020, the government has allowed most borrowers to press the pause button on their payments without interest accruing. “You can claim the student loan interest deduction based only on amounts actually paid,” Kantrowitz (higher education expert Mark Kantrowitz) said.
The article concludes:
If the debt forgiveness cleared your balance entirely, you’ll no longer be able to claim the deduction. Yet you should be eligible if you’re still left with student debt and resume your payments.
More than 12 million taxpayers claimed the student loan interest deduction in 2018, with tax savings of up to $550, according to Kantrowitz.
Just for reference, this is what has happened to college tuition since the government got involved. Since this chart was posted, there have been more increases.
