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The different ways forgiven student debt is taxed

Math problem student at black board_pexels-karolina-grabowska-6256067-1
Figuring out how to pay off student loans is a math problem that goes well beyond school days. (Photo by Karolina Grabowska)

The payment pause on student loans expires in six weeks. As that Aug. 31 deadline approaches, former students also are waiting for President Joe Biden to take further action to help lessen, or eliminate, their higher education debt.

In addition to the political ramifications of any White House action, especially in an important midterm election year, there also are tax implications.

Taxable forgiven debt: The tax code generally treats forgiven or canceled debt as taxable income. It's officially known in the tax world as cancellation of debt income or CODI, with emphasis (from me) on income.

There are some exceptions, usually carved out by Congressional action.

That's the case in some cancelled student loan debt.

Some tax-free forgiven student debt: "While student loan forgiveness is generally included in taxable income, the current tax code contains a complicated patchwork of exceptions," writes Garrett Watson, senior policy analyst at the Tax Foundation, in a recent post at the tax nonprofit's website.

The American Rescue Plan Act (ARPA), enacted in 2021 in response to COVID-19 economic pressures, temporarily exempted certain forgiven student loans from federal tax through 2025. The rationale, notes Watson, is that tax burden arising from treating forgiven student debt as income partially undermines debt relief.

And that's just one case.

Watson discusses other student loans forgiveness and tax situations in the article Inconsistent Tax Treatment of Student Debt Forgiveness Creates Confusion.

The bottom line of the piece, which earns this weekend's Saturday Shout Out, is, in Watson's words, is that "the rules regarding the tax treatment of forgiven loans should be consistent and broadly applied, rather than fragmented."

My added epilogue: Consistent tax laws in many other areas also would be a great benefit to all of us.

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