The Biden Administration has forgiven federal student debt for up to $20,000 for eligible individuals. Thanks to the American Rescue Plan, student loan forgiveness is exempt from federal taxes, and most state taxes. However, some states say they will tax loan forgiveness as income, meaning eligible borrowers would have to pay up to $1,000 in taxes to take advantage of federal loan forgiveness.
This has put many lower and middle class borrowers in a complicated situation. Some may decide to forgo loan forgiveness because they are unable to pay the state taxes on it.
Why Are Some States Taxing Student Loan Forgiveness?
Prior to the American Rescue Plan, student debt cancellation was considered taxable income by both the state and federal government. Following the Plan, the federal government has chosen to make student debt cancellation exempt from federal taxes. Most states have followed federal tax policy but several states have chosen to either deviate from the federal standard or have yet to update their legislature with these exemptions.
Arkansas is a special case because they are one of the few states that do not follow federal tax policy, so there was no obvious indication that student debt relief would not be taxed. However, the Arkansas Department of Finance and Administration has reported to NPR that they are reviewing the option to exempt student debt forgiveness from state taxation. The Arkansas General Assembly, which is led by Republicans, many of whom are outspoken critics of student loan forgiveness, is scheduled to meet in early 2023.
The other states who will tax student loan forgiveness are: North Carolina, Mississippi, and Indiana. Decisions about taxation are still under review in: Wisconsin, West Virginia, Minnesota, and California.
Who Is Eligible for Student Loan Forgiveness
Borrowers who have taken out federal student loans are eligible for $10,000 of relief while students who are also eligible for Pell Grants, a federal financial grant given to students from low income families, can receive up to $20,000 in relief. To qualify, individual borrowers must have an annual income of less than $125,000 – $250,000 annually if you are married – in either 2020 or 2021.
Status of Forgiveness Program
Due to numerous lawsuits filed by opponents to the loan forgiveness plan, the application for debt relief is temporarily closed. The Biden administration is confident the program will move forward once it has been reviewed by the courts. In the meantime, the administration has announced it will extend the pause on student loan payments until June 30, 2023.