A new student loan bill has been introduced to Congress in Washington D.C. in regards to federal taxes on student loans. The champion of the bill, Senator Ron Wyden, introduced it mid-July in order to create a solution that aids student loan borrowers in their effort to start saving earlier. This piece of legislation is known as the Student Loan Tax Relief Act, and its purpose is to do just as its namesake implies.
The purpose of this bill is to eliminate a hidden tax on student loans which is applicable only to forgiven student loans. This tax is relatively unknown, but it can come as a ridiculous surprise to student borrowers. The tax essentially views forgiven loans as “phantom” income; therefore, this income is taxable. If a borrowers loans have been forgiven, then they are liable to receive a huge tax on the forgiven loan amount. Furthermore, if a borrower is simply in a position to have their loans forgiven, then they are still eligible for this tax.
Senator Ron Wyden expects this bill to aid students “to save for retirement or buy their first home after school.” These two points are major issues as research has found significant declines in retirement funds and home ownership in the millennial generation. A generation that is plagued in student loan debt.
The bill is technically an amendment to the original Internal Revenue Code of 1986. This code currently taxes loans that have been forgiven for various reasons. These reasons include income-based repayment and income-contingent repayment programs, death of borrower, disability of borrower, or victim of fraud from a higher education. While these loans can sometimes be forgiven for these reasons, the government often extracts additional revenue by throwing one last tax at these loans.
One of the main points of this bill is to help student loan borrowers. It was stated by Ron Wyden that this tax is counter-productive. If loan forgiveness programs exist to help borrowers gain a foothold in the economy, then the tax on forgiven loans simply “defeats the purpose” of the loan forgiveness program.
At any rate, the passing of this bill simply puts student loan borrowers in a better position. It simply eliminates the possibility of an additional expense on top of the already exhaustive loan repayment process. While this bill only applies to borrowers with forgiven loans, it focuses on a group of borrowers who needed more help in the first place. If this bill passes through the legislative process, then it will be put into effect at the start of the year 2017.