Even if your student debt is on hiatus right now as part of COVID relief, you probably dread its imminent return. What if someone could snap their fingers and make it all go away?

Well it’s not exactly the plan proposed by President-elect Joe Biden, but the new Commander-in-Chief and a group of supporters pitched the idea to write off thousands of dollars in student debt per person.

Now, after the second round of U.S. Senate elections in Georgia on Tuesday, Biden secured a Democratic majority in the Senate – as in the US House – the odds of student loan relief appear to be stronger.

However, even if the current plans come to fruition, they won’t eliminate everyone’s debt – and they can come with a gargantuan “tax bomb” for you. Here’s what you need to know.

How Much Debt Could Be Forgiven?

Americans currently hold more than $ 1.7 trillion in student debt, according to the Federal Reserve. Yet the government’s current hiatus on payments and interest is set to end in late January, even as COVID-19 cases mount across the country.

Biden has previously said he supports legislation that would “immediately” write off $ 10,000 in federal student debt per person.

Borrowers are in “real trouble,” Biden said in November. “They have to make choices between paying their student loans and paying their rent, those kinds of decisions.”

But is $ 10,000 enough? A group of prominent Democrats, led by Senator Elizabeth Warren and the new Senate Majority Leader Chuck Schumer, is saying no.

They want the Biden administration to write off up to $ 50,000 in debt as a form of economic stimulus, allowing people to start buy houses and invest for retirement.

What could really happen?

In addition to this immediate help, several other measures are underway to reduce Americans’ student debt, including improvements to the government’s income-based repayment program and the civil service loan forgiveness program.

The big problem is that all of these measures would be extremely expensive. Biden risks not pushing them through if he encounters objections from conservative Democratic senators, as the new Democratic Senate majority is thin as a razor.

The story continues

Some supporters say the new president can use an executive order to write off debt under the 1965 Higher Education Act, but that could lead to the first major legal battle for the new administration.

Biden could also try to push through a watered-down bilateral solution. A new deal can only target borrowers severe economic distress – and it may not be tax exempt.

Coming tax bomb

Normally, you have to pay taxes on the canceled debt balance, as if you “earned” it in cash. This means that Americans enjoying tens of thousands of loan forgiveness could face a huge bill at tax time.

Goldman Sachs suggests borrowers could 20% the amount forgiven, Forbes reports.

In his platform, Biden pledged to change the tax code to make forgiveness through the tax-free income-based repayment program, claiming that “Americans shouldn’t have to take out a loan to pay off. their taxes when they are finally released from their student loans. “

While Schumer calls for these amendments to extend to all student loan forgiveness, you will certainly want start saving, In case. If you can’t pay your tax bill right away, the IRS will start charging you interest and fees.

What are your other options?

It is critical to recognize that these forgiveness proposals only apply to federal student loans, and not to private loans obtained from banks and other non-government lenders.

So if you have a private loan – or if you don’t think Biden and his supporters will be successful – you’ll have to pursue other options.

Fortunately, interest rates on private student loans have fallen dramatically during the pandemic. Borrowers with federal or private loans should consider refinancing – that is, swapping your old loan for a new one that offers a much lower interest rate.

It is true that switching from a federal student loan to a private loan would make you ineligible for government relief in the months to come. It might be a tough call to make.

However, there is no downside if you already have a private loan. Refinancing now while the rates are cheap, it could drastically reduce your monthly payment, save you thousands, and pay off the balance years earlier.