Canceling Student Loan Debt May Come With a Tax Bill

Biden announced last month that he would forgive $10,000 in student loan debt for borrowers who earn less than $125,000 a year. He said 95% of borrowers, or around 43million people, would get the relief – but some will have to pay tax on it.

Video transcript

Cody HUNANIAN: We are very concerned that some borrowers may have their student debt canceled and be taxed.

JARED WALCACK: Right now, at least five states are in line to mandate this student loan debt forgiveness.

President Biden’s student loan forgiveness plan could erase thousands of debts for millions of borrowers across the country.

But depending on the state you live in, you may still have to pay tax day.

Cody HUNANIAN: Some states, especially those with more conservative leadership, told us they thought they would tax borrowers. And we also know that there are other states that think they’re not going to tax borrowers.

JARED WALCACK: Indeed, historically, at both the federal and state levels, any form of debt relief or cancellation is effectively taxable income.

Cody HUNANIAN: The federal government will not impose this relief. Lawmakers, led by Senator Schumer and others, passed a bill during the pandemic to ensure the federal government never taxes student debt that has been canceled by 2025.

JARED WALCACK: Some states follow this. In fact, most do. But there are a handful of states that don’t fully comply with the federal code or comply with this provision. And therefore, they are going to impose the release of student debt.

I also don’t think many states want to tax this particular type of debt cancellation. Most of them already comply in a way that they won’t. But for those remaining states, we’ll have to see if there’s some sort of fix in the works. But if you’re a borrower and you get $10,000 or $20,000 in loan relief, you’re probably very happy with it even if you have to pay $500 or $1,000.

Joe Biden: If you earn less than $125,000, you get $10,000 off your student debt. If you earn less than $125,000 a year and received a Pell Grant, you’ll get an additional $10,000 of that total, for a total relief of $20,000. 95% of borrowers can benefit from these actions.

Cody HUNANIAN: We have achieved a great victory in canceling the federal student debt thanks to the action of the President. And if we have to focus on state governments trying to avoid unnecessary taxes, so will we. The fight goes on. This victory is just the beginning of so many other problems that we will continue to solve.

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