President Biden’s student-loan write-off is the gift that keeps on giving, unless you’re the sap who paid off her loan or didn’t go to college. Thanks to a little-known provision in the March 2021 COVID spending bill, student borrowers will get a hefty tax benefit on top of their $10,000 or $20,000 in canceled debt.
Progressives started hounding Mr. Biden on loan forgiveness while he was still on the campaign trail, and they tucked a perk into last year’s $1.9 trillion American Rescue Plan in anticipation. The provision, sponsored by Sens. Elizabeth Warren and Bob Menendez, makes loan forgiveness tax free through Jan. 1, 2026. The senators’ press release at the time boasted that this “paves the way” for President Biden to forgive up to $50,000 in debt. And so it did.
This contradicts the normal state and federal tax principle that treats loan forgiveness as taxable income. If a borrower earns income of $60,000, and has $10,000 in loans forgiven, his taxable income for the year becomes $70,000. The money is a windfall gift, while the lender that forgives the debt will deduct it from income.
Not anymore on federal taxes for student borrowers. According to the senators, under their tax-free plan an average borrower earning $50,000 in income will save about $2,200 in taxes for every $10,000 of forgiven student loans. The borrowers get a double bonus, while taxpayers assume another burden in the interest that must be paid on the additional government debt now and higher taxes later. Only some 13 states chose not to follow automatically the new tax-free forgiveness policy in the 2021 bill.
In 2021 Congress’s Joint Committee on Taxation scored the Warren-Menendez provision at a cost of $44 million, since at the time few borrowers were expected to receive forgiveness. But given the sweeping nature of the Biden loan cancellation, the left-leaning Tax Policy Center now estimates the cost could be roughly $34 billion.
There will be no comparable tax reprieve for Americans who take out other loans and struggle to repay, or Americans who were frugal and didn’t take out college loans. But give the Warren-Biden Democrats time. Don’t be surprised if a general debt amnesty is part of their agenda the next time there’s a recession and people are stretched to make their loan payments.
* Guest editorial by The Wall Street Journal.
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