Student Loan Forgiveness May Be Taxable In These States
Arkansas, North Carolina, Minnesota, Mississippi, Wisconsin, and others may tax student loan forgiveness as income.
Struggling student loan borrowers rejoiced over Biden’s recent announcement that the federal government was canceling up to $20,000 for pell grant recipients, and $10,000 for all other federal student loan holders. However, many were eager to know whether or not they would have to pay taxes on that student loan forgiveness. In good news, the federal government announced that they would not tax the amount forgiven. However, certain states are might tax any amount of relief received.
28 states, including Washington D.C., will follow suit with the federal government and not tax student loan forgiveness as income, according to The College Investor. States not on that list may soon learn that they may be liable to list any received relief as income. Many states haven’t officially cleared this up. However, some states had already announced they will be taxing it as income.
North Carolina was the first state to assert that recipients of student loan forgiveness would have to pay their fair share of taxes on that relief. They announced this in a memo via the state’s Department of Revenue on August 31st. According to reports from The Tax Foundation, four other states’ laws are set up to require relief recipients to use that amount as taxable income. This includes Arkansas, Minnesota, Mississippi, and Wisconsin.
Usually, when someone receives any form of student loan forgiveness whether it be from the new initiative or others, the amount forgiven is added to taxable income during tax season. This can affect tax returns, either lowering the amount individuals receive in a refund, or increasing the amount they owe that year in taxes. For this reason, it is important to understand your own state’s rules pertaining to the newly enacted waivers.
While the outlook for student loan borrowers in these five states is dismal, there is still time left for state legislatures to amend current tax laws and waive requirements for them to count student loan forgiveness as income received. With the majority of all states and the federal government vowing not to tax this money, the few states that might may be persuaded to change. Jared Walczak, vice president of state projects at the Tax Foundation said, “There’s going to be a lot of pressure on these states to follow the federal government’s treatment and not have this be included in taxable income,” when speaking with Bloomberg.
Many borrowers still celebrating the recent announcement that reside in one of these states considering taxing student loan forgiveness are hopeful things will change before the coming tax season. Cathay Newman, a graduate of Louisiana State University that recently moved to Mississippi for work told the Associated Press that she is hopeful of this. While she noted that the measure wouldn’t affect her tremendously, she fears that it will have negative consequences for some, placing them into higher tax brackets. “If they stay in the state, they could end up with a pretty hefty tax burden if things don’t change,” Newman said. “I won’t be happy if I have to do it. I can do it. But a lot of people can’t,” Newman said.
While student loan forgiveness may result in certain borrowers paying more come the next tax season, the benefits still likely outweigh the effects in most cases. Many recipients will likely only have their tax burden altered by hundreds of dollars, which is minuscule in comparison to having either $10,000 or $20,000 wiped clear from their slate. With months left before tax season begins, states also have plenty of time to amend laws and join the movement pledging not to tax student debt relief.
