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Here is where a tax may be imposed on your student loan forgiveness.

Introduction

If you’re set to benefit from President Joe Biden’s student loan forgiveness program, you may face a financial hit come tax time, depending on the state you live in.

States That Tax Loan Forgiveness

This is because some states treat the amount of forgiven loans as income, meaning you’ll have to pay taxes on that amount. As explained below, most states will not tax loan forgiveness because they have chosen not to, or they do not have an income tax at all, and some states have not made a decision yet.

President Joe Biden’s Loan Forgiveness Initiative

The initiative for forgiveness was announced by President Joe Biden in August and is set to forgive up to $10,000 for borrowers who hold federal student loan debt. This amount rises to $20,000 for those who attended college on a Pell Grant. Eligible borrowers can receive loan forgiveness as long as they have an individual income of less than $125,000, or $250,000 for married couples filing jointly. About 95% of federal student loan borrowers will qualify for the help, and borrowers can apply for it now at the Federal Student Aid website.

State Taxes on Loan Forgiveness

While millions of people will see their debt wiped clean, some borrowers will have to pay state income taxes at the end of the year. The amount could exceed $1,000 depending on the amount of forgiven debt and the state’s income tax rate. Although debt forgiveness will be beneficial in the long run in most cases, borrowers have the option to decline forgiveness by contacting their student loan servicer.

Note

Last month, a federal court temporarily blocked the Department of Education from processing the loans due to a lawsuit filed by six states arguing that President Joe Biden does not have the authority to order student debt forgiveness. The department says it will resume processing forgiveness for the 26 million people who have information so far – if and when the judicial order is lifted in the Eighth Circuit Court.

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Sources:

– The White House. “FACT SHEET: President Biden Announces Student Loan Relief for Borrowers Who Need It Most.”

– Congressional Budget Office. “Re: Costs of Suspending Student Loan Payments and Canceling Debt,” Page 3

– Federal Student Aid. “One-Time Federal Student Loan Debt Relief,” Click on “What if I don’t want to receive debt relief?”

– United States Court of Appeals for the Eighth Circuit. “No: 22-3179 State of Nebraska, et al. Appellants v. Joseph R. Biden, Jr., in his official capacity as the President of the United States of America, et al. Appellees.”

– United States District Court Eastern District of Missouri Eastern Division. “State of Nebraska, et. al., Plaintiffs; v. Joseph R. Biden, Jr., et. al., Defendants,” Pages 1-2.

– The White House. “By The Numbers: Millions of Americans’ Student Loan Costs Will Rise Dramatically Under Republican Officials’ Plans.”

Source: https://www.thebalancemoney.com/heres-where-your-student-loan-forgiveness-may-be-taxed-6826952


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