Of loan cancellation, taxes and basketry

Today we are going to learn two things. First, Princeton University. Second, student loans. The link? Basketry, or lack thereof.

Princeton University is located in Princeton, New Jersey. Nassau Street is a main boundary for the west end of campus. Nassau Hall overlooks Nassau Street.

The British Army once occupied Nassau Hall. This army was defeated at the Battle of Princeton, as its soldiers marched south to confront the Continental Army which had just won the Second Battle of Trenton.

At that time, the school in Princeton was called the College of New Jersey. That name lives on at another school now located near Ewing, New Jersey, also in Mercer County.

Hugh Mercer was an officer and trusted advisor to General George Washington. He was killed at the Battle of Princeton.

The seal of Mercer County bears the Mercer Oak, reputed to be Hugh Mercer’s final resting place on the Princeton battlefield.

The United States was recognized as an independent nation when the Treaty of Paris was signed in September 1783. The Confederate Congress was informed of this while housed in Nassau Hall, making Princeton the (then) capital of the new country.

Yeah, Princeton University is a big deal. It is often ranked as the best undergraduate institution in the country.

Princeton has no law school, no business school, no medical school. It offers degrees in many fields, including music and philosophy, but none in basket weaving.

Major universities can and do offer degrees in the humanities. I don’t know of any university that offers a degree in basket weaving.

I mention this because some creatures of the politician species accuse students of racking up debt while pursuing useless basket weaving degrees.

If no one gets a basket weaving degree, those politicians must be misinformed. Their real intention is to denigrate those who earn degrees in the same fields as many Princeton undergraduates.

If I ruled the world, I wouldn’t have supported the sweeping student loan forgiveness program enacted by the Biden administration.

But in my world, we wouldn’t blame the recipients of this program either. Or denigrate the humanities with allusions to basket weaving.

As Bob Dylan said in his song “Idiot Wind”, an apt title for the rantings of many of our politicians, “I can’t help it if I’m lucky”.

The second topic is the tax treatment of those lucky souls who receive student loan forgiveness.

Borrowing money is not a taxable event. The borrower is supposed to repay the debt. Therefore, assets and liabilities offset each other.

If the loan is canceled, the net assets increase. The tax law obliges the borrower to declare his income. There are exceptions for things like insolvency, bankruptcy, certain farm or real estate business debts, and others.

Congress makes the tax law, so Congress makes the exceptions. The same Congress that once met at Nassau Hall.

The COVID-inspired American Rescue Plan Act states that qualifying student loan forgiveness will be excluded from borrower income until 2025. This exclusion covers beneficiaries of the new Biden plan.

There is also a Civil Service Loan Cancellation Program and a Total and Permanent Disability Cancellation Program.

A borrower can apply for an income-based repayment plan. There are four variants. Loan repayments can be spread over 20 years (undergraduate) or 25 years (graduate) and structured according to income.

When the applicable payment term expires, the loan balance is cancelled. Income Oriented Loan Scheme debts that are canceled before 2026 are also excluded from income.

The federal tax treatment of the Biden plan loan forgiveness is clear. The IRS tells lenders not to issue 1099-Cs for student loan forgiveness. Any uncertainty is at the state level.

New Mexico follows federal tax treatment. This means that New Mexico borrowers will also be eligible for the state tax exclusion.

If you like a bit of US history with your tax column, hopefully you won’t blame one student, like the many undergraduates at Princeton, who majored in the humanities. Even if they don’t know how to weave a basket.

I am not in favor of generalized loan forgiveness. Hey politicians, just say this simple statement, not like a silly wind, blowing every time you move your mouth.

James R. Hamill is the director of tax practice at Reynolds, Hix & Co. in Albuquerque. He can be reached at [email protected]

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