The plan to erase student loans proposed by Vice President Joe Biden could alleviate the crushing financial burdens of millions of borrowers, but in some places, the tax man may seek a piece of the relief that is provided.
This is due to the fact that some states count debts that have been forgiven as taxable income. This means that borrowers who are still making payments on their student loans may be required to pay taxes on as much as $10,000 or even $20,000 that was subtracted from their balance. According to a tally performed by the Tax Foundation, a think tank located in Washington, District of Columbia, forgiven student loans will be subject to state income taxes in the states of Mississippi, Minnesota, Wisconsin, Arkansas, and North Carolina if these states do not change their laws to conform with a federal tax exemption for student loans. The exemption currently exists on the federal level.
Cathy Newman, a graduate of Louisiana State University who has recently begun working as a biology instructor for first-year students at the University of Southern Mississippi in Hattiesburg, is disappointed to learn that. It is possible, according to her estimations, that she will wind up owing a few hundred dollars of money that she would have been able to keep if she had remained in Louisiana.
Newman stated that she is able to come up with the cash because she has a good job, but she knows of a lot of other borrowers who will still be stuck in difficult financial positions even after their loans have been forgiven even though Newman is able to come up with the cash because she has a good job.
“If things don’t change, they could end up with a fairly substantial tax burden if they remain in the state,” said Newman. “If they leave, they won’t have to worry about it.” “If I’m forced to do it, I won’t be happy about it. I can do it. But a good number of people are unable to.”
Under the forgiveness program that Vice President Biden outlined toward the end of the previous month, more than 40 million people in the United States might have their student loan debt reduced or completely canceled. Individuals whose annual incomes are less than $125,000 and households whose annual incomes are less than $250,000 will each have $10,000 of their federal student loan debt forgiven by the president. The additional $10,000 that was going to be given to students who had previously received federal Pell Grants would not be given out. However, this only applies to people whose loans were paid off before to July 1, meaning that current high school seniors and students who will follow in their footsteps are not eligible for this benefit.
Borrowers in states that are impacted may be compelled to report the $10,000 or $20,000 in eliminated loan payments as income, despite the fact that this will be a windfall for those borrowers over the course of their loan’s lifetime who are eligible for the benefit. That might result in the taxpayer owing several hundred dollars more in additional taxes, depending on the tax rates of the state in which they live, their other sources of income, and the deductions and exemptions that they are eligible to claim.
The Associated Press was informed by representatives of the tax agencies in a number of states, including Virginia, Idaho, New York, West Virginia, Pennsylvania, and Kentucky, that their jurisdictions will not in any way levy taxes on forgiven student loans as a result of Vice President Joe Biden’s program. Officials in a couple additional states’ departments of revenue have stated that they require additional research to determine.
To cover the costs of graduate school, Newman, now 38, took out student loans. Even though the federal Public Service Loan Forgiveness program required an additional five years of teaching experience on top of the five years she has already taught at the University of Louisiana Monroe, she had already put herself in a position to qualify for relief under the program. When Biden’s proposal goes into force, she will see a reduction in her debt of $10,000; but, the relief will not be free because the tax law in Mississippi is already in place.
Newman added, “It’s not a major burden for me, but it could be for a lot of other people, which is what I’m worried about, especially if it’s unexpected, and I think a lot of people don’t realize that.” “It’s not a huge burden for me, but it may be for a lot of other people,” Newman said.
Any kind of relief in states that would tax the debt that was written off would have to originate from the respective legislatures of those states. In recent interviews with the media, leaders of the Minnesota Legislature and Democratic Governor Tim Walz have indicated that there is broad support for a fix, which could come during the 2023 session or even earlier on the remote chance that there will be a special session. This could take place in Minnesota.
In Wisconsin, the administration of Democratic Governor Tony Evers plans to propose a remedy in the state budget for the next year; but, in order for the proposal to become law, it will need approval from the Republican-controlled Legislature. And Evers cannot formally make that request until after the November election, when he must first win reelection. Republican legislative leaders and Evers’ Republican opponent, Tim Michels, did not respond to mails requesting comment on the topic of the tax on student loans.
However, in Mississippi, the chairman of the state Senate committee that is responsible for taxes stated that he is willing to take a look at the matter the next year when the Legislature meets again. Brandon Republican State Senator Josh Harkins stated that he has a lot to learn about what the tax rules in his state have to say regarding the cancellation of debt.
“I’m sure people will want to look at adjusting that or making some changes in the law, but a lot of factors have to be considered,” said Harkins, noting that Mississippi enacted its largest-ever tax cut earlier this year and adding that he wants to gauge the impact of inflation before making major decisions regarding tax policy. “I’m sure people will want to look at adjusting that or making some changes in the law,” said Harkins. “Just this last week everything came to a head.”