The finacial Impact on student loan forgiveness program on minority and its tax implication. 15 pages ,see draft attached

Student loan has reach 1.5 trillion dollars which is the second highest debt burden for household after mortgage. Student loans have surpassed credit card and car loans.

Most of student loan borrower are middle income and low-income household which largely composed of minority in the United States. According to research by Judy Scott-Clayton of Columbia University, Black graduates with a bachelor’s degree default at five times the rate of white bachelor’s graduates—21% compared with 4%. Among all college students who started college in 2003–04 (including borrowers and non-borrowers), 38% of Black students defaulted within 12 years, compared to 12% of white students. (Brookings). The first type of relief appears in Section 3513 of the CARES Act, which provides temporary relief to federal student loan borrowers. This provision permits student loan payments, principal, and interest to be deferred for a period of 6 months, through September 30, 2020. There is no penalty to the borrower for the suspension of loan payments. Interest will not accrue on the loan amount for which payment is suspended (LIVIA Q. ABER, OF COUNSEL, THE WAGNER LAW GROUP)

Minority families have the most burden of student loan and therefor increase the existing racial economic inequality. On top of existing factors of economic inequality, the covid-19 worsen the situation. The coronavirus pandemic disproportionally affected minority with the highest death rate of African America, Native American and Latinos. Most of the jobs that were affected by the COVID-19 are mostly informal and composed largely by minority. The purpose of this study is to analyze the impact of student loan forgiveness program will have on borrower taxable income. The study will depict the impact of the student loan forgiveness per demography and income.

The congress and the new administration have decided to look into student loan issue by providing some sorts of debt relief. Some of the members of congress want to completely forgive the student loan, some $50,000 and the last option is $10,000. However, the unknown is if the debt forgiveness will be tax free or it will on the other hand create another tax burden for middle class families. The current law suggest that the amount forgiven is treated has income, therefor taxable. Section 61(a)(12) of the Internal Revenue Code of 1986 (IRC) specifies that gross income includes income from the discharge of indebtedness of $600 or more in any calendar year. However, IRC Section 108(f) specifies conditions under which student loan forgiveness is excluded from income. Specifically, IRC section 108(f)(1).

According to the 2020 tax brackets (see below table) if the loan is forgiven for example by 50,000, the lower income taxpayer will find himself from the 10% taxable income to almost 22% taxable income. On the other hand, the higher income taxpayer will stay on his usual 24% taxable income.

The shifts in the distribution of families with student loans across age and educational attainment since 1992 are notable. In 1992, 85.0 percent of those with student loans had a family head younger than age 45, including 59.7 percent who had a head younger than age 35. In 2019, this decreased to 66.7 percent and 40.5 percent, respectively. Likewise, the percentage of families with student loans who had a head with only some college increased from 20.8 percent in 1992 to 34.3 percent in 2019. In other words, more families with student loan debt will have less time to pay it off before their heads reach retirement age. Furthermore, fewer of those with student loans are going to receive the benefits (increased earnings) of a full college education from assuming this debt (Craig Copeland, Ph.D., Employee Benefit Research Institute).

Considering the fact that most student with student loans have not been able to pay their student loans and that affect their credit score and therefor make them ineligible to buy a hoe or a new car. This burden really does affect also other business which was hoping of a strong middle class that will have a purchasing power to buy their items. Many minority men, especially blacks are languishing in different prisons across the land and many of their crimes are related either by poor education or poverty. Now many black Americans have a perception on going to school. Today mindset is equating school to loan, which are pushing many young minorities with low income to stay away of college. By making college affordable, the affect of it will be felt in different aspect of life, from crime reduction to business boom.

Part of this student loan burden, most of low-income minorities were trap by predatory lenders to accept to take loans in distress. Defined by the Federal Deposit Insurance Corporation (FDIC) as the practice of imposing unjust and abusive loan terms on borrowers, predatory lending is a growing problem within higher education. Predatory lending always looks good on the surface. It may seem like a great interest rate or quick access to funds, but there’s always a catch – that often doesn’t surface until students have signed on the dotted line. These types of lenders are always out to make a profit at the expense of the borrower, typically by making it difficult to repay the loan and easier for students to fall into financial difficulties. (college-resource-center)

Going to school I believe should be human right like in all major developed countries. Forgiving debt will reduce the racial economic inequality, hence reducing generational poverty on minority families. To reach that, debt forgiveness should be targeted and tax free.

The implication is that the federal student loan relief will help many families to find some room on their budget to rejuvenate the economy which was greatly affected by the Covid-19 pandemic. Most of families are prevented to buy homes due to high debt to income ratio. Once the school loan is forgiven, the debt-to-income ratio will decrease therefor the house market will go up and more jobs will be recovered after the economic recession caused by the pandemic.

References

https://www.nerdwallet.com/article/taxes/federal-income-tax-brackets

https://finaid.org/loans/forgivenesstaxability/

https://academic.oup.com/cid/advance-article/doi/10.1093/cid/ciaa815/5860249

https://www.brookings.edu/policy2020/votervital/who-owes-all-that-student-debt-and-whod-benefit-if-it-were-forgiven/

Student Loan Debt: Who Has It and How Much? By Craig Copeland, Ph.D., Employee Benefit Research Institute

Student Loan Debt Assistance under the CARES Act BY LIVIA Q. ABER, OF COUNSEL, THE WAGNER LAW GROUP

https://i0.wp.com/www.brookings.edu/wp-content/uploads/2016/10/ccf_20161020_scott-clayton_evidence_speaks_11.png?w=768&crop=0%2C0px%2C100%2C9999px&ssl=1