President Biden’s announcement on August 24 that many individuals with student loan debt would see up to either $20,000 (Pell Grant recipients) or $10,000 (others) forgiven has unsurprisingly received a lot of attention. To qualify, borrowers must have income under $250,000 if MFJ or HH or under $125,000 for all others. The announcement did not say what this measure of income is (AGI, modified AGI, something else) and for what year. The White House estimates that this income level is about 95% of individuals.
First – what is the tax effect? The American Rescue Plan Act (P.L. 117-58, 3/11/21) modified Code §108(f) to provide that for 2021 through 2025, gross income excludes income from cancellation of higher education student loans. So, for federal purposes, assuming these cancellations of up to $20K or $10K of student loans occurs in 2022 through 2025, no federal income tax is owed.
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