MBA borrowers could benefit from Covid relief provision


President Joe Biden signed the covid relief bill, the American Rescue Plan Act, on March 11, which contains a provision that eliminates taxes on loan forgiveness until 2025.

The American Rescue Plan Act, enacted by President Joe Biden on March 11, is 5,600 pages long. It contains a key provision that could have an impact on MBAs and MBAs student borrowers, drafted by a trio of Democrats seeking to pressure the president to use his executive power to forgive dozens of thousands of individual student debt.

The legislation included in the ARP introduced by Congressmen Jimmy Gomez (CA-34), Bill Pascrell (NJ-09) and Senator Bob Menendez (NJ) makes any student loan forgiveness tax-exempt. Under current law, most student loan cancellations – including forgiveness through federal income-based repayment plans – are treated as additional taxable income, often pushing borrowers into lower brackets. tax higher and leaves them with a hefty tax payment on their canceled loans.

Many Democrats want President Biden to forgive $ 50,000 in college debt by executive order, which he has expressed reluctance to do. By making the rebate tax-free until 2025 – relief that would apply to public, private and institutional loans – Democratic Congressmen say they are removing one of the biggest barriers to action by the government. ‘executive. According to them, a family of four who earns $ 100,000 a year and whose $ 50,000 in college loans are canceled could receive more than $ 10,000 in federal tax savings under this provision.


Richard prisinzano

The Gomez-Pascrell-Menendez bill would exclude the full or partial cancellation of any university loan between December 31, 2020 and January 1, 2026 from a borrower’s income. Would this help MBAs? To find an answer, Poets and quants turned to the experts.

In early February, Penn Wharton’s budget model examined the potential impact of the $ 1.9 trillion Covid relief bill then debated in Congress. Richard Prisinzano, director of policy analysis, tells P&Q that the final version of the law signed last week differs only slightly from what Wharton assessed six weeks ago, and therefore from the model’s verdict – that ARP is likely to lead to an increase in output in 2021, as plan spending stimulates the economy, but GDP will decline in subsequent years “as additional public debt crowds out investment in productive capital.”

With regard to the provision on debt relief, Prisinzano says, there is a scenario where MBAs get relief – even though they make a lot of money after graduation.

“Currently, if I cancel a loan, it’s taxable income,” Prisinzano says. “It’s true for student loans, it’s true for all kinds of things – it’s taxable income. So I think the way I read this amendment is, it’s something that Biden couldn’t do away with – even if you believed, and I think there are legal scholars who believe that, that Biden could forgive a certain amount of student debt through the executive. action, he could not forgive the taxable part.

“Let’s say I went to a very expensive business school, Stanford or Penn, or whatever,” he continues. “I have a loan and it’s a student loan, so I would probably have a really good rate on this student loan. So my incentive to pay off this loan is probably pretty low – I’d rather pay more, say, on my mortgage, or take some of that extra money that I’m not using to pay off debt to invest in the stock market or whatever. i’m in business. So it could be a huge debt for someone with a very high income.

“And so, that kind of distributive analysis of writing off that debt, you could actually benefit people who have fairly high incomes, which in our model would actually be a bit of a drag. Because, again, it shows the growing debt without really increasing the investment because they are already making that investment, the money they are saving on loans with very low interest rates.

Prisinzano says this highlights another likely sticking point between executive action versus legislation: widespread action that eliminates individual debt for all means that MBA and others earn a lot of money benefit in a way that many might consider unfair or disproportionate.

“If it was a law rather than executive action,” he said, “I could imagine there is a discussion about, ‘Do we really want to forgive the $ 50,000 of student loans to someone who earns $ 250,000 a year and strategically pays off their student loan? down slowly because it’s such a good interest rate? “


There’s another way borrowers with recent MBA or MBA degrees could benefit – in fact, maybe already have – from ARP: through direct stimulus checks of $ 1,400 per person.

The key is income status. Most MBAs in the top three industries of consulting, finance or technology earning too much money to receive direct stimulus payments – ie above the ARP threshold of $ 75,000. However, if MBA or MBA students were out of work in 2019 or 2020 or paid lower wages and filed taxes for those periods in mid-February, they would be entitled to payments.

Direct payments are expected to be made to around 159 million households, according to government estimates.

“I guess MBAs could potentially receive checks, depending on the income amounts collected before business school,” Prisinzano says. “I’m sure some business school students would be eligible for the checks. I have the impression that they work for a few years, and then they go to school, so their income could exceed the threshold, so above $ 75,000. So it’s hard to say, but there’s certainly nothing in there that says if you go to business school you can’t get it.

“If, say, you made money in 2019 and therefore you are not eligible, but in 2020 you are eligible and you filed your taxes on February 12, then you will be eligible for checks that. this time saying, “Hey, I was fine in 2019, but look at my taxes for 2020.” “

He adds that there may also be rare cases where an MBA works full time to pay for a business school, has lost his job due to the pandemic, and then receives unemployment benefits. They could receive additional unemployment benefits, Prisinzano says, some of which is not taxable.

“I’m sure this also applies to some business school students,” he says. “Usually when you’re unemployed it’s taxable income. The first $ 10,000, $ 10,200 is not taxable for that year. Again, I’m sure there are cases where business school students would benefit. “


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