Some states may tax Biden’s relief for student loan debt
MINNEAPOLIS — President Joe Biden’s student loan forgiveness plan could lift crushing debt burdens from millions of borrowers, but the tax man may demand a cut of the relief in some states.
Some states tax forgiven debt as income, which means borrowers who are still paying down student loans could owe taxes on as much as $10,000 or even $20,000 that was taken off their bill. In Arkansas, Minnesota, Mississippi, North Carolina and Wisconsin, forgiven student loans will be subject to state income taxes unless they change their laws to conform with a federal tax exemption for student loans, according to a tally by the Tax Foundation, a Washington, D.C.-based think tank.
That dismays Cathy Newman, a Louisiana State University graduate who just took a job teaching at the University of Southern Mississippi.
She figures she could end up owing a few hundred dollars that she could have kept had she stayed in Louisiana.
Newman, 38, said she can pay it, but knows of a lot of other borrowers who will still be stuck in difficult financial positions even with their loans forgiven.
“If they stay in the state, they could end up with a pretty hefty tax burden if things don’t change,” Newman said. “I won’t be happy if I have to do it. I can do it. But a lot of people can’t.”
More than 40 million Americans could see their student loan debt cut or eliminated under the forgiveness plan Biden announced late last month.
The president is erasing $10,000 in federal student
loan debt for individuals with incomes below $125,000 a year, or households that earn less than $250,000.
He’s canceling an additional $10,000 for those who also used federal Pell Grants to pay for college. But it only applies to those whose loans were paid out before July 1, which leaves out current high school seniors and students who will follow them.
Although having $10,000 or $20,000 in loan payments eliminated will be a boon over the long term to borrowers who qualify, those in the affected states might be required to declare that as income.
Depending on a state’s tax rates, the taxpayer’s other income and the deductions and exemptions they’re able to claim, that could add up to several hundred extra tax dollars that they will owe.
Spokespeople for tax agencies in several states — including Idaho, Kentucky, New York, Pennsylvania, Virginia and West Virginia — said their states won’t tax student loans forgiven under Biden’s program.
Revenue officials in a few other states said they
needed to do more research to know.
Any relief in states that would tax the forgiven debt would have to come from their Legislatures.
Leaders of the Minnesota Legislature and Democratic Gov. Tim Walz have indicated in recent media interviews that there’s broad support for a fix, which could come during the 2023 session, or even earlier on the remote chance of a special session.
In Wisconsin, Democratic Gov. Tony Evers’ administration plans to propose a fix in the state budget next year, but that would have to be approved by the Republican-controlled Legislature.
And Evers needs to get reelected in November before he can formally make that request. Republican legislative leaders and Evers’ GOP challenger, Tim Michels, did not reply to messages seeking comment on the student loan tax issue.
However, in Mississippi, the chairman of the state Senate committee in charge of taxes said he’s willing to take a look when the Legislature convenes next year.