Those With Loan Forgiveness Could See Tax Bill Depending on the State

Wednesday, August 31st, 2022 -- 11:01 AM

(CBS News) The Biden administration’s plan to forgive up to $20,000 in student loan debt is slated to lift a financial burden from millions of Americans.

Yet the plan could add tax bills as high as $1,100 for borrowers in some states, according to a recent Tax Foundation analysis. That may catch some borrowers by surprise, given that the Biden administration noted its loan forgiveness won’t be considered federal taxable income under a provision of the American Rescue Plan Act.

That law, however,  doesn’t exempt loan forgiveness at the state level, although some states will likely follow the federal law in their treatment of the loan relief, the think tank said.

As many as 13 states may consider Biden’s loan forgiveness to be taxable income, socking borrowers who receive up to $10,000 in loan forgiveness with a tax bill of between $300 to $1,100, according to the Tax Foundation.

That could change, as some states may eventually side with the federal government’s decision to make the debt relief nontaxable, but borrowers may want to consult their tax preparers in the meantime, the group noted.

Factoring in $10,000 of debt relief, Wisconsin residents with forgiven loans could see $530 in tax liability. That amount could be doubled for borrowers who receive up to $20,000 in debt forgiveness, Walczak noted.

President Biden last week announced his plan to forgive up to $20,000 for borrowers who received a Pell Grant, which are given to low-income students, and up to $10,000 for all other borrowers.

To be eligible, an individual borrower must earn less than $125,000, while married couples qualify if they earn less than $250,000. Mr. Biden said roughly 43 million borrowers will benefit from the debt forgiveness.

Student loan debt in the U.S., both private and public, has ballooned to $1.75 trillion this month, according to Federal Reserve Bank of St. Louis data. Biden’s plan will not forgive private student loan debt.

Borrowers who face state taxes for loan relief will owe the levy for the tax year in which the loan is forgiven, the analysis noted. For instance, 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.

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