Thanks to Biden, everyone wants their student loans forgiven. I know that isn’t necessarily how life works. We don’t just get a handout for the hope of our vote, but all the income based payment plans have a forgiveness built in after a couple decades of payments. The problem is that ANY loan forgiveness is a taxable event unless it is excluded (presently all student loans are excluded since COVID, but that benefit is expiring soon).
While taxing small loans does not affect a taxpayer significantly, large loans could put a middle class worker into the poor house if there is not another exclusion available. I propose the following changes to the taxation of ALL loan forgiveness:
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If the loan forgiven results in taxable income greater than $15,000, then the taxpayer has the option to split the taxable income into equal parts over 2-6 years (taxpayer’s choice), rather than paying the entirety in one year.
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The additional income incurred from forgiven loans cannot be taxed at a higher tax rate than what the tax payer’s highest tax bracket would be without the additional income from the forgiven loan (or a reasonable minimum amount if the taxpayer has no taxable income without the forgiven loan).
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For Student loans specifically, only the principle amount forgiven is taxable income, the unpaid interest accrued is excluded from income.
As I am talking about student loans, 8% interest made sense back in the days when mortgages were 12%. Maybe these government student loans for our education should have VERY affordable interest rates UNLESS you default at some point. I would make more of an effort to pay if I wasn’t watching the total grow by more in interest annually than I could possibly afford, so making a dent at my debt is impossible. Might as well save up to pay a tax bill in 9 more years. I am not looking for a handout, just looking to make paying for my education a LITTLE bit easier (20 years later)