A pair of Democratic lawmakers have introduced a bill that would provide tax relief to student loan borrowers who have been granted debt relief after consistently repaying their student loan debt for at least 20 years, giving them an exemption from being taxed on the amount forgiven on the loans.
Rep. Mark Pocan, D-Wis., and Frederica Wilson, D-Fla. introduced the Relief for Underwater Student Borrowers Act on Tuesday. “Student loan debt is weighing down our economy and holding back a generation of Americans as total student loan debt has grown to more than $1.2 trillion—more than total U.S. credit card debt,” Pocan said in a statement. “This legislation closes a major gap in our tax code which penalizes some borrowers who have been granted debt relief after at least 20 years of consistent repayment towards their student loan debt.”
Under current law, the student loan balance forgiven as part of the Income Based Repayment or Pay as You Earn programs is treated as taxable income for the borrower, creating a tax liability that most qualifying borrowers are unable to afford. Student loans forgiven under other programs, including Public Service Loan Forgiveness and TEACH Grants, are not treated as taxable income. There are 1.4 million people enrolled in the Income Based Repayment program and 190,000 people enrolled in the Pay as You Earn program.
Earlier this year, President Obama formally widened the pool of eligible participants in the Pay As You Earn Program to help an estimated additional 5 million people manage their debt. Borrowers who have demonstrated a good faith effort at repaying their loans and are currently underwater would qualify.
Today, the average student graduates with around $29,400 in loans, according to the lawmakers. At private nonprofit colleges, average student debt is around $32,300. Nationally, student debt tops $1.2 trillion. Given the extent of the student debt crisis, the bill aims to give borrowers who have been crushed by student debt for at least two decades the opportunity to get out from under the loans and further contribute productively to the U.S. economy.
“As a member of the Subcommittee on Higher Education and Workforce Training, college affordability is one of my top priorities,” said Wilson. “Today, student debt is at a record high, with individual debt forcing many people to put off major purchases such as buying a home or automobile. This bill prevents student loan borrowers from being hit with an additional tax burden for debt that has been forgiven after 20 years of consistent repayment, and in the event of suffering a total permanent disability or death, this bill prevents the debt forgiven from being considered taxable income. The Relief for Underwater Student Borrowers Act helps individual borrowers and their families, as well as strengthens the economy.”
Of the $1.2 trillion in student debt, over $1 trillion is owned by the federal government, according to the lawmakers. Fifty-eight percent of all student debt is held by families in the bottom 25 percent of household incomes.