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President Joe Biden's personal loan forgiveness plan could lift the crushing debt burdens of millions of borrowers, but the taxman could also require a reduction in relief in some states.
It’s because some states forgive debt as income that debtors who are still paying off student loans could owe taxes on as much as $10.000 or even $20.000 that’s taken out of their account. In Mississippi, Minnesota, Wisconsin, Arkansas and North Carolina, forgiven student loans could be subject to state income taxes unless they change their laws to comply with a federal tax exemption for student loans, according to a report by Tax Groundwork, a Washington, D.C.-based think tank.
Spokespeople for tax agencies in several states — including Virginia, Idaho, the Big Apple, West Virginia, Pennsylvania and Kentucky — told The Associated Press that their states will not actually tax student loans forgiven under Biden’s plan.
All signs point to Illinois now not taxing forgiven loans.
Hearing that at least five states could also tax relief dismays Cathy Newman, a Louisiana State University graduate who just accepted a job teaching freshman biology at the southern Mississippi school in Hattiesburg. She figures she could end up owing a few hundred dollars in cash that she might have saved if she had stayed in Louisiana.
Newman noted that she may be able to get the money because she has a good job, but she knows many different borrowers who will still be caught in sticky financial situations even with their loans forgiven.
“If they live in the state, they could end up with a huge tax burden if things don’t change,” Newman noted. “I may not be happy if I have to do it. I’m going to do it. But a lot of people can’t.”
More than 40 million Americans could see their student mortgage debt reduced or eradicated under the forgiveness plan Biden introduced late last month. The president is erasing $10.000 in federal student loan debt for individuals earning less than $125.000 for 12 months, or families earning less than $250.000. He’s canceling an additional $10.000 for people who also used federal Pell Grants to pay for college. However, it’s most effective for those whose loans were paid off before July 1, which leaves out current high school seniors and students who will follow them.
Aside from the fact that children with $10.000 or $20.000 in eradicated loan payments could be a long-term boon to qualifying borrowers, those in affected states may be required to report this as income. Factoring in a state’s tax rates, the taxpayer’s varying income, and the deductions and exemptions they are able to report, this could add up to a hundred dollars of additional tax they owe.
Newman, 38, went into debt to pay for graduate school. She had already set herself up for a reduction in her federal loan forgiveness application, though it would require an extra five years of education on top of the five she already taught at the Monroe School in Louisiana. Biden’s program would shave $10.000 off her debt when it goes into effect, but under current Mississippi tax law, the reduction wouldn’t be free.
“It’s not a huge burden for me anymore, but it could be for a lot of other individuals, which is what worries me, especially if it’s sudden, and I think a lot of people don’t understand that,” Newman stated.
Any help to states that could tax forgiven debt would have to come from their legislatures. Minnesota legislative leaders and Democratic Gov. Tim Walz have indicated in recent media interviews that there is ample room for a fix, which could come as early as the 2023 session, or even sooner in the unlikely event of a single session.
In Wisconsin, the Democratic administration of Gov. Tony Evers plans to propose reforming the state’s affordable housing tax in the next year, but that would need to be approved by the Republican-controlled Legislature. And Evers must be reelected in November before he can formally make that request. Republican legislative leaders and Evers’ GOP challenger Tim Michels did not respond to messages seeking comment on the college mortgage tax issue.
Young, Mississippi, the chairman of the state Senate tax committee said he is likely to take a look when the Legislature convenes next year. Republican Sen. Josh Harkins of Brandon said he would learn more about what his state’s tax laws say about debt forgiveness.
“I’m sure people will try to tweak this or make some changes to the law, but there are a lot of components that need to be considered,” Harkins said, noting that Mississippi enacted its largest tax cut ever earlier this year and adding that he wants to assess the impact of inflation before making major fiscal policy choices. “That all happened in the last week.”
