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New Act Introduced by House Democrats Would Provide Tax Relief for Underwater Student Borrowers

New Act Introduced by House Democrats Would Provide Tax Relief for Underwater Student Borrowers

Representatives Mark Pocan (WI) and Frederica Wilson (FL), both currently serving on the House Education and the Workforce Committee, introduced H.R. 5329, Relief for Underwater Student Borrowers Act, on Tuesday.  Most notably, the bill provides an exemption from being taxed on the amount of student loan debt forgiven in cases where the borrower has been granted debt relief for 20+ years of consistent repayment on their loan. 

Citing the impact of student loan debt on the economy, Representative Pocan asserted, “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.”  He added, “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.”  Congresswoman Wilson also acknowledged the magnitude of student debt, explaining, “As a member of the Subcommittee on Higher Education and Workforce Training, college affordability is one of my top priorities. 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.”

Loan balances forgiven as a part of Income Based Repayment (IBR) or Pay as You Earn (PAYE) programs are treated as taxable income under current law.  In contrast, the amount forgiven under programs such as Public Service Loan Forgiveness and TEACH Grants are not currently treated as taxable income.  If this bill were to pass in its current form, balances forgiven under IBR and PAYE would now be exempt from tax, as long as the borrower made consistent repayment for at least 20 years.

An additional 5 million people became eligible to participate in PAYE when President Obama formally widened the pool of eligibility earlier in 2014. 

Student debt, as a whole, is north of $1.2 trillion dollars; the average student graduates with $29,400 in loans.  Families in the bottom 25% of household incomes are responsible for 58% of all student debt.

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