Borrowers Might Still Be On The Hook For Taxes On Forgiven Student Loan Debt

Millions of Americans learned earlier this month that as much as $20,000 in student loan debt had been unilaterally wiped out via executive action by the Biden administration. In more than a dozen states, however, the federal government handout might come with a sizable tax burden.

As Jared Walczak of the Tax Foundation explained, 13 states currently treat forgiven debt as a type of taxable income. This could mean that borrowers in those states would owe their state tax collectors as much as $2,000.

While he noted that these states have not yet confirmed how they plan to address the Biden loan forgiveness plan, residents thereof could be in for a tax-season surprise.

As Biden announced last week, borrowers who earn under $125,000 per year individually or $250,000 as a family would automatically qualify for $10,000 in forgiven student loan debt. Those who received a Pell Grant based on financial need would have up to $20,000 in debt wiped out.

The administration confirmed that a majority of those borrowers would fall into the latter category, which could mean they would be responsible for a larger tax payment if required under their state’s tax code.

At the high end of the scale, current laws indicate that borrowers in Minnesota and Hawaii could be on the hook for $1,970 and $2,000, respectively, for their discharged student loans. The American Rescue Plan Act approved last year in Congress stipulated that such forgiven loans would not be considered taxable income at the federal level until 2025.

The loan forgiveness scheme has drawn backlash from both the left and right as progressives express a desire to see even more amnesty and conservatives portray the plan as unfair to Americans who either repaid their student loans or decided to forgo college altogether.

U.S. Sen. Ted Cruz (R-TX) criticized the plan and its perceived consequences, asserting: “What President Biden has in effect decided to do is to take from working-class people. To take from truck drivers and construction workers right now, thousands of dollars in taxes in order to redistribute it to college graduates who have student loans.”

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