Biden Adminitration's Student Loan Debt Forgiveness Plan Could Leave Borrowers Owing Tax Money

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A recent analysis from the Tax Foundation says that because the student loan relief funds are not tax-exempt at the state level, borrowers from 13 states could incur tax debts from the forgiveness.

The Biden administration's plan to forgive up to $20,000 in student loan debt is postured to benefit middle-class Americans, but the plan could add tax bills as high as $1,100 for borrowers in certain states, according to a recent Tax Foundation analysis.

Last week, President Biden announced his plan to forgive up to $10,000 for student-loan borrowers, with borrowers who received a Pell Grant — a grant reserved for low-income students — eligible for up to $20,000.

To be eligible, an individual borrower must earn less than $125,000 and married couples qualify if they earn less than $250,000 collectively, and private loans are not included in the forgiveness, according to CBS News.

The Biden administration noted its loan forgiveness will not be considered federal taxable income under a provision of the American Rescue Plan Act, which makes the recent analysis from the Tax Foundation a surprise.

While the Tax Foundation’s analysis says that some states will likely follow the federal law in their treatment of the loan relief, the rescue plan law does not make loan forgiveness exempt at the state level.

According to Bloomberg News, Hawaii, Idaho, Kentucky, New York, Pennsylvania and Virginia have already decided to exempt student loan forgiveness money from state taxes.

Arkansas, California, Massachusetts and South Carolina are currently undecided, and Mississippi's Department of Revenue confirmed that it will tax the student loan forgiveness dollars, according to Bloomberg. 

This means that while the administration believes the loan relief will positively affect up to 43 million borrowers, as many as 13 states could consider Biden's loan forgiveness to be taxable income. 

According to the Tax Foundation, borrowers who receive up to $10,000 in loan forgiveness could be looking at a tax bill of between $300 to $1,100 in the following states:

  • Arkansas: $550
  • Hawaii: $1,100
  • Idaho: $600
  • Kentucky: $500
  • Massachusetts: $500
  • Minnesota: $985
  • Mississippi: $500
  • New York: $685
  • Pennsylvania: $307
  • South Carolina: $700
  • Virginia: $575
  • West Virginia: $650
  • Wisconsin: $530 

Jared Walczak, the foundation's vice president for state projects, wrote in the recently released analysis that these potential tax debts could double for those receiving $20,000 in debt forgiveness, and the debts will be due in the tax year the loan is forgiven.

For example, if the loan relief is provided in 2022, those state taxes will be due by April 15, 2023, which is the filing deadline for that year's taxes.

"In the coming weeks and months, we are likely to see states issue guidance on the treatment of discharged student loan debt," Walczak said in the analysis. 

Despite the potential of states siding with the federal decision, the foundation suggests that borrowers consult their tax preparers in the meantime.

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