President Joe Biden’s student loan forgiveness plan could ease the crushing debt burden of millions of borrowers, but the taxman could demand a reduction in relief in some states.
This is because some states tax-exempt debt as income, which means borrowers who are still repaying their student loans could owe taxes on up to $10,000 or even $20,000 that was deducted. of their bill. In Mississippi, Minnesota, Wisconsin, Arkansas, and North Carolina, canceled student loans will be subject to state income tax unless they change their laws to comply with a federal tax exemption for student loans, according to a tally by the Tax Foundation, a Washington, DC-based think tank.
This dismays Cathy Newman, a Louisiana State University graduate who has just accepted a first-year biology teaching position at the University of Southern Mississippi at Hattiesburg. She thinks she might end up owing a few hundred dollars in cash that she could have saved if she had stayed in Louisiana.
Newman said she can find money because she has a good job, but she knows many other borrowers who will still be stuck in dire financial straits, even if their loans have been canceled.
“If they stay in the state, they could end up with a pretty heavy tax burden if things don’t change,” Newman said. “I won’t be happy if I have to. I can do it. But many people cannot.
More than 40 million Americans could see their student loan debt reduced or eliminated under the remission plan Biden announced late last month. The president writes off $10,000 in federal student loan debt for people with incomes below $125,000 a year or households earning less than $250,000. It waives an additional $10,000 for those who also used federal Pell grants to pay for college. But that only applies to those whose loans were repaid before July 1, which excludes current high school students and the students who will follow them.
While the elimination of $10,000 or $20,000 in loan repayments is a long-term boon to eligible borrowers, those in affected states may be required to report this as income. Depending on a state’s tax rates, the taxpayer’s other income, and the deductions and exemptions they can claim, this could be several hundred dollars in additional tax they will owe.
Spokespersons for tax agencies in several states — including Virginia, Idaho, New York, West Virginia, Pennsylvania and Kentucky — told The Associated Press that their states would definitely not tax the loans. students canceled under Biden’s program. Tax officials in a few other states said they needed to do more research to find out.
Newman, 38, went into debt to pay for college. She had already set herself up for relief under the Federal Civil Service Loan Forgiveness Scheme, although it requires an additional five years of teaching on top of the five she has already taught at the University. of Louisiana Monroe. Biden’s program would reduce his debt burden by $10,000 when it goes into effect, but under Mississippi’s existing tax law, the relief will not be free.
“It’s not a huge burden for me, but it could be for a lot of other people, which worries me, especially if it’s unexpected, and I think a lot of people don’t realize that. don’t count,” Newman said. .
Any relief in states that would tax the canceled debt would have to come from their legislatures. Minnesota Legislature leaders and Democratic Gov. Tim Walz have indicated in recent media interviews that there is broad support for a fix, which could come in the 2023 session, or even sooner. at the low chance of a special session.
In Wisconsin, the administration of Democratic Gov. Tony Evers plans to propose a fix in the state budget next year, but it would have to be approved by the Republican-controlled Legislature. And Evers must be re-elected in November before he can officially make that request. Republican legislative leaders and Evers’ GOP challenger Tim Michels did not respond to messages seeking comment on the student loan tax issue.
However, in Mississippi, the chairman of the Senate tax committee said he’s ready to take a look when the Legislature meets next year. Republican Sen. Josh Harkins, of Brandon, said he needed to know more about what his state’s tax laws say about debt forgiveness.
“I’m sure people will want to consider adjusting this or making changes to the law, but there are a lot of factors that need to be considered,” Harkins said, noting that Mississippi has enacted its most significant reduction in ever made tax earlier this year and adding that he wants to assess the impact of inflation before making major tax policy decisions. “It all just hit last week.”
Binkley reported from Washington, DC that Associated Press writers Emily Wagster Pettus in Jackson, Mississippi, and Scott Bauer in Madison, Wisconsin contributed to this story.