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.
Wisconsin is one of the states that have yet to update their policy since the American Rescue Plan, labeling student debt relief as taxable. 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 re-elected 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.
To take effect, changes to the tax law would have to be made before tax season in the early months of 2023.
The other states who will tax student loan forgiveness are: North Carolina, Mississippi, and Indiana. Decisions about taxation are still under review in: West Virginia, Minnesota, California and Arkansas.
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.