These 5 states could tax Biden’s latest student loan forgiveness plan
This week, the U.S. Department of Education started discharging student debt for 800,000 people. Depending on where they live, they could be taxed on it.
Here’s what you should know.
What’s happening?
Last month, President Joe Biden’s administration announced that more than 800,000 student loan borrowers will have $39 billion in debt forgiven. That followed the Supreme Court shooting down the $400 billion student loan forgiveness plan that would have reduced or canceled federal student loans for 43 million people.
Student loan payments have been paused since March 2020 and resume in October, with interest accruing in September.
The new relief is happening because the Department of Education is fixing income-driven repayment plans to ensure borrowers who have made payments for 20 or 25 years have any remaining debt canceled.
“We are standing up for borrowers who did everything right, but whose progress toward forgiveness went uncounted due to past administrative failures that the Biden-Harris team has worked tirelessly to correct,” Secretary of Education Miguel Cardona said in a news release.
This week, a judge dismissed a case from two conservative groups seeking to block the relief. The lawsuit, filed by the Cato Institute and Mackinac Center for Public Policy, claimed the policy violated federal law and would harm their recruitment efforts. A federal judge found the two groups did not have standing in the case, The Washington Post reported.
Borrowers started receiving discharges this week. You’ll be emailed directly by your loan servicer.
What does the tax code say?
Your tax situation with student debt forgiveness also depends on your repayment plan, according to the Tax Foundation.
Under the tax code, forgiven or canceled debt is taxable income.
“If a borrower has debt forgiven, it is treated as if the borrower earned additional income in the previous tax year equal to the amount of forgiven debt,” according to a post from the Tax Foundation.
However, the American Rescue Plan Act of 2021 exempted those with income-driven repayment plans through 2025. There are also exemptions through the Public Service Loan Forgiveness program.
You don’t have to pay federal taxes on student debt relief through 2025 because of the American Rescue Plan.
However, some states might tax it.
Business Insider reported those states are:
Arkansas (Arkansas state legislature could change this.)
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This story was originally published August 18, 2023 at 12:22 PM with the headline "These 5 states could tax Biden’s latest student loan forgiveness plan."
